For an accounting system, proper bookkeeping prevents errors in financial statements. That is directly relevant to any business’s operations and decision-making. Meera runs a textile business in Mumbai. She has demanded a business loan of Rs 10,00,000 to enhance her operations. Her audit revealed that she has been spending Rs 2,00,000 more than necessary due to accounting errors; her reported net income has fallen by 20%. This error not only rejected her loan application but also postponed her growth by 6 months.
Underreporting Revenue
This records fewer revenues than what has been earned. Let’s understand with an example. Ravi is a South Mumbai cafe owner who submitted a revenue of Rs 15,00,000 in that particular year but forgot to count one extra Rs 1,50,000 for the catering events.
In this scenario, he underreported by 10%. As per his perception, his business valuation fell, and his friendship didn’t bring him that much whopping partnership, which is worth Rs 5,00,000. His business expansion took an extra 3 months to complete.
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Overstating Expenses
These costs bring in the recording of more expenses than what has been incurred. The case of Sunita, who runs an electronics store with an annual turnover of Rs 50,00,000, wrongly recorded ₹ 1,00,000 amount as personal expenses being business expenditures.
This is increasing her total expenses by 2% and reducing her net profitability by 2, i.e., from 15% to 13%. As a result, there were doubts in the minds of those who would have invested in her business to the extent of Rs 8,00,000.
Misclassifying Accounts
Misclassifying accounts involves placing financial entries in the wrong categories. Akash caused a 0.25-percent distortion in his working capital ratio by misclassifying ₹50,000 of long-term investments as short-term assets for a logistics company with total assets of ₹20,00,000. This misclassification misled stakeholders about the company’s financial health and led to a 2-month delay in the approval of ₹3,00,000 in funding.
Failing to Account for Depreciation
Priya is an printing machinery owner for a printing business whose value is Rs 5,00,000. She did not enter the annual depreciation of Rs 50,000. As a result, there was a 10% overstated value of an asset. This led to a lowered credibility of the business while agreeing to a loan for Rs 7,50,000. Thus, owing to this, the process of acquiring a loan was delayed by 45 days. In other words, depreciation refers to the decrease in the value of an asset as time passes.
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Advantages and disadvantages of detecting accounting errors
Advantages | Disadvantages |
Prevents financial misstatements | Time-consuming to identify and correct errors |
Improves loan and funding chances by up to 20% | It may require additional investment in software |
Enhances credibility chances for investments over Rs 5,00,000 | Regular checks can interrupt daily tasks |
Maintain accurate cash flow projections | Initial training costs can range from Rs 10,000 to 30,000 |
Conclusion
Accurate accounting is essential for business success. Entrepreneurs like Meera, Ravi, Sunita, Akash, and Priya highlight how even minor mistakes can lead to significant setbacks, delaying growth, funding, and operational efficiency.
Frequently Asked Questions
Q. How do accounting errors affect financial statements?
They distort financial health, impacting decisions and funding opportunities.
Q. Can accounting errors delay loan applications?
Yes, errors can delay loans by months and affect approval rates.
Q. What are common accounting errors?
Misclassifications and understated revenue are common among small businesses.
Q. How can accounting errors be minimized?
Regular audits and reliable accounting software can reduce errors by up to 90%.