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What does understated mean?

When an accountant says that an amount is understated, it means two things:

  1. The amount is not the correct amount, and
  2. 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.