Discuss one of the following types of accounting errors. How often do you estimate they occur? Would the financial statements really be misleading if these errors were not corrected?
Types of Accounting Errors:
1.A change from an accounting principle that is not generally accepted to an accounting principle that is acceptable.
2.Mathematical mistakes.
3.Changes in estimates that occur because a company did not prepare the estimates in good faith.
4.An oversight, such as the failure to accrue or defer certain expenses or revenues.
5.Misuse of facts.
6.Incorrect classification of a cost as an expense instead of an asset, and vice versa.
Let's talk about error no.6 " Incorrect classification of a cost as an expense instead of an asset, and vice versa."
As is said the integrity of any books of accounts is only as good as the data entered. The abovementioned error is in the nature of misclassification.
Its possible that a low value asset purchased has been expensed on the income statement, whereas the correct treatment is to post it in the Balance Sheet and depreciate it through its useful life. If it is expensed on the inome statement in the year of purchase, the company won't get to claim depreciation and also miss out on the corresponding tax savings. Secondly it will cause a mis-representation of the financial staements because it won't show the fair picture of company's assets and hence it will also affect any asset based ratios calculated for planning and forecast purposes.
Similarly its also possible that an expense which should have been charged to the income statement is actually posted to either decrease an asset balance or a new liability is created. That too will lead to an unfair view of the books of accounts and because expense hasn't been charged to the profit and loss account it will erroneously show a higher profit or lower loss as the case may be which will in turn affect all the profitability ratios calculated at year end.
If the Company has a qualified accounting team in place, the frequency of these kind of errors in not so high, but at the same time they have a higher misleading effect on the financial statements which don't show the true and fair view of the books of accounts.
Discuss one of the following types of accounting errors. How often do you estimate they occur?...
Discuss one of the following types of accounting errors. How often do you estimate they occur? Would the financial statements really be misleading if these errors were not corrected? Mathematical mistakes.