When an accountant says that an amount is understated, it means two things:
- The amount is not the correct amount, and
- The amount is less than the true amount. In other words, the amount is too small.
To illustrate the term understated, let's assume that a company is reporting its accounts payable as $21,000. Let's also assume that the correct or true amount of accounts payable is $23,000. An accountant will say that the reported amount of $21,000 is understated by $2,000.
Because of double-entry bookkeeping or accounting there will also be a second general ledger account with an error for the same amount.
