Definition of Overstated
When an accountant uses the term overstated, it means two things:
- The reported amount is incorrect, and
- The reported amount is more than the true or correct amount.
In a double-entry accounting or bookkeeping system, another account will also have an incorrect amount.
Example of Overstated
If a company reports that its prepaid insurance is $8,000, but the true or correct amount of prepaid insurance is only $7,000, the accountant will say that the reported amount of prepaid insurance is overstated by $1,000.
In a double-entry accounting system, if the balance in the account Prepaid Insurance is overstated (too much is being reported) it is likely that the account Insurance Expense is understated (too little is being reported).