The matching principle in accounting requires accountants to match the expenses with their related revenues. Sometimes, however, accountants may need to estimate figures. Once they establish the actual value, they must adjust their accounts to reflect the actual transaction or position. A term related to similar adjustments is ‘true up’.
What is True Up in Accounting?
The term ‘true up’ means to align, make level or balance something. In accounting, it refers to the adjustments that accountants make to reconcile or match two account balances. The accounting entry passed to make such adjustments is known as a true-up or adjustment entry. Usually, accountants make true-up entries when closing the accounts. This process usually happens annually. However, it may also occur quarterly, based on requirements.
The term true up is informed and only used to describe adjustment entries. Accounting standards do not refer to true up in any standard or clause. Usually, companies use these entries to fix errors, record differences in estimates, account for accruals, etc. Under the matching principle, accountants must make these adjustments to present a true and fair view in the financial statements.
When do businesses need to True Up their accounts?
In essence, true up refer to accounting adjustments passed to reconcile or match the accounts. Therefore, the need for these adjustments arises when there is a mismatch in accounting records. These mismatches may occur due to many reasons. Some of these include the following.
Errors and omissions
Accountants usually true up the accounts due to errors and omissions. These instances form one of the highest numbers of adjustment entries passed by accountants. Most modern accounting software may prevent these. However, they still occur and require adjustments.
The accruals concept in accounting requires accountants to record expenses and revenues when they occur. Sometimes, accountants may receive actual figures after the accounting period. Therefore, they need to true up the accounts to adjust for them.
Budgeting is an essential part of many businesses. Accountants usually use historical data to estimate figures in their budgets. Sometimes, however, these figures may not match with actual numbers. Therefore, they will give rise to true-up entries.
Similar to budgeting differences, accountants may need to make estimates about other figures as well. For example, accountants must create provisions for uncertain liabilities. Once they get the actual amounts, they will need to true up the accounts.
A company, Friends Co., records utility bills on an accrual basis. This process is in line with the requirements of accounting principles and standards. However, the company receives utility bills one month after the month to which it relates. At the end of each year, Friend Co. must, therefore, estimate the electricity expense for the last month.
In 2019, Friend Co. closed its accounts. Based on historical information, the company estimated the utility expense to be $10,000. Therefore, the company made the following journal entries.
Dr Utilities expense $10,000
Cr Utilities payable $10,000
In 2020, Friends Co. received and paid the actual bill, which amounted to $15,000. Therefore, the company must pass a true-up entry to adjust for the actual figures. The journal entries will be as follows.
Dr Utilities expense $5,000
Dr Utilities payable $10,000
Cr Cash $15,000
True up in accounting refers to the reconciliation, balancing, or matching up of accounting records. This term refers to the adjustment entries passed by accountants, usually at year ends. There are several factors that can give rise to the need for accountants to pass true-up entries. These include errors and omissions, timing and budgeting differences, and quantification.