Importance of Accurate Data Entry for Financial Statements

Bookkeepers use accounts to keep track of assets, liabilities, income, and expenses. The accounts used to sort and store transactions are part of the company’s general ledger. General ledger accounts are grouped according to their nature to create financial statements. This means that the accuracy of the financial statements is rooted in how accurate transactions are initially recorded.

The following three examples demonstrate how erroneous data entry can paint a wrong financial picture.

Scenario #1

The company paid $10,000 towards its loan payable, of which $5,000 was for interest. The bookkeeper wrote a check and put the whole amount towards the loan payable account.

Results:

• Cash is correct because QuickBooks automatically credits the bank when writing a check. 
• Loan payable is understated because only $5,000 went towards principal; the actual balance should have been $131,000.
• Since the entire amount was posted to the loan account, none went towards interest expense (an income statement account). Net income is overstated since it is missing an expense of $5,000. The net income overstatement is reflected in the retained earnings account. (Refer to our blog about Retained Earnings.)
• This mistake will deceive users that:
  1. The company has less debt, and
  2. The company generated more net income.

Scenario #2

The company bought a new vehicle for $25,000. The bookkeeper entered the check towards automobile expense.

Results:

• Cash is correct because QuickBooks automatically credits the bank when writing a check. 
• A vehicle is a fixed asset and should therefore be capitalized. Since the vehicle was expensed, assets are understated. 
• Being that the entire cost of the vehicle was expensed, net income is understated by $25,000 (this is reflected in the retained earnings account). (Albeit we should have taken depreciation expense, skipping it for clarification purposes.)
• This mistake will deceive users into thinking that:
  1. The company has fewer fixed assets, and
  2. The company had more operating expenses than it really had.

Scenario #3

The company paid $20,000 via credit card for an open vendor bill (accounts payable), but the bookkeeper expensed it.

Results:

• The credit card balance is correct because QuickBooks automatically credits the credit card when recording a credit card charge. 
• The vendor balance of $25,000 was paid already, resulting in an overstatement of the AP account. This error, if not identified, will cause accounts payable to keep on carrying this paid‐off balance.
• Net income is understated because the expense (cost of goods sold or something) was double booked.
• This mistake will show users that:
  1. The company has an aged payable (because the payment was not applied) and users may doubt the company’s way of handling credit. This can be a potential issue for a lender or investor.
  2. The company had a lessor (gross) profit margin because there are double expenses understating income.

Importance of Understanding Each Transaction

The above are only three examples of misclassifications, but the results are all the same – if transactions are wrongly classified, the financial statements will not present accurate balances, and the financials can be misleading. Our examples included small amounts but apply this to a big company that pays a vendor $500,000 and double books it instead of applying it to the open bill ‐ it has a massive negative effect. Understanding what is behind an entry will help bookkeepers from blindly posting transactions to accounts because they record all transactions to an account (or more than one account, think about interest and principal). Each transaction is a puzzle piece in the financial statements and equally important for accurate reporting. The sum of each transaction adds up.