The Effects of an Overstatement of Assets on Other Areas in Financial Statements

Save

Financial statement users rely on the published statements to evaluate company performance and make decisions. Company accountants record the financial transactions experienced by the company and prepare the financial statements for these users. Occasionally, the accountants make errors that overstate the assets. An overstatement of the assets leads to errors in other sections of the financial statements.

Overstatement Of Liabilities

One potential effect of an overstating the assets involves overstating the liabilities. Every transaction recorded by the accountant impacts at least two accounts. If one account represents an asset, the other account may represent a liability. For example, if the company purchased supplies for which it plans to pay in the future, the accountant increases the Supplies account, an asset and increases the Accounts Payable account, a liability. If the accountant enters too high of a number or enters the transaction twice, both the assets and the liabilities are overstated.

Overstatement Of Equity

One similar result from overstating the assets involves overstating the equity. If one account in a transaction represents an asset, the other account may represent a equity account. For example, when a company receives cash in exchange for common stock, the accountant increases the Cash account, an asset and increases the Common Stock account, a equity account. If the accountant enters too high of a number or enters the transaction twice, both the assets and the equities are overstated.

Overstatement Of Revenues

Another potential effect of an overstating the assets considers the impact on revenues and net income. The accountant calculates net income by subtracting total expenses from total revenues. When the accountant records a sale to a customer, she records an increase to Cash, an asset, and an increase to Sales, a revenue account. If the accountant enters too high of a number or enters the transaction twice, both the assets and the revenues are overstated. An overstated revenue balance leads to an overstated net income for the period.

Overstatement Of Expenses

An opposite impact on net income occurs when the overstatement of assets leads to an overstatement in expenses. When the accountant records an expense, he records a decrease to Cash, an asset, and an increase to Expense. If the accountant enters too high of a number or enters the transaction twice, both the assets and the expenses are overstated. An overstated expense balance leads to an understated net income for the period.

Related Searches

References

Promoted By Zergnet

Comments

You May Also Like

Related Searches

Check It Out

Are You Really Getting A Deal From Discount Stores?

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!