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What does understated mean?

Author:
Harold Averkamp, CPA, MBA

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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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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