What does understated mean?

Definition of Understated

In accounting, understated means that a reported amount is less than the actual, true amount based on the accounting rules. In other words, the reported amount can be described as:

  • Incorrect
  • Too low
  • Less than it should be

In a double-entry bookkeeping or accounting system, another general ledger account will also be misstated by the same amount.

Example of Understated

Assume that a company reports its accounts payable as $210,000. Also assume that the correct/actual/true amount of accounts payable is $230,000. In this situation, an accountant will say that the reported amount of accounts payable is understated by $20,000. In a double-entry accounting system, the amount in another account will also be understated by $20,000.

If the $20,000 understatement is determined to be a misplaced invoice from a marketing consultant, the company's Marketing Consultants Expense will be the account that is understated by $20,000.

As a result of the $20,000 understatement, the company's income statement will report too little of SG&A expenses, and too much net income. The company's balance sheet will report too little in accounts payable and too much in owner's (or stockholders') equity.

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