There are several issues that can lead to financial accounting problems. These include the elements of financial performance that a company tracks, the basis on which it records transactions, and the way it handles depreciation. In contrast, mathematical errors are unlikely to cause major problems thanks to the built-in checkpoints of double entry accounting.
One of the more simple sources of financial accounting problems is a failure to cover all three of the main types of financial documents. The first is a simple record of transactions, which is aggregated into a profit and loss account. The second is a record of cashflow, which does not always match up with transactions because of credit agreements and delayed payments; cashflow forecasts are also important. The third is a balance sheet, which lists the overall assets and liabilities of a company, effectively measuring its financial health. Not having all three of these documents in place can reduce the opportunities to identify problems with a company’s finances and potential solutions.
Some financial accounting problems can be caused by inconsistencies in the basis on which the accounts are prepared. One such area is the decision whether to record transactions at the time of payment, or the time when goods or services are physically delivered. Not using the same basis for all transactions can cause confusion. This is particularly true where the payment takes place in one accounting period and the delivery in another.
Depreciation is another source of financial accounting problems. It is the accounting process used to take account of the fact that an asset loses value over time, such as how long it takes to physically wear out. Because depreciation has to be fixed in advance, it is effectively an estimation. Different methods can vary in how long the depreciation period is set for, the rate and pace of depreciation, and what, if any, final value is given to the asset. A company deciding on a depreciation method will often have to settle both legal accounting requirements and the rules set down by tax officials.
Perhaps surprisingly, mathematical errors are not a major source of financial accounting problems. This is because of the use of double entry bookkeeping in which each transaction is recorded twice, once as a debit and once as a credit. This involves looking at both sides of a transaction; for example, a store making a sale increases its cash balance, but sees a corresponding decrease in the value of its unsold stock. The double entry system means that over any period of time, the total value of entries in the credit column and the debit column should be identical. Checking this regularly for disparities can uncover errors quickly, before they cause major problems.