What’s True-Up Adjustment
True-up adjustment is the journal entries which aim to match, reconcile or tie-up two more balance together. The company record accrues expense by estimate the amount of expense and record in the financial statement. However, the actual expense may differ from the estimation, so they have to adjust to correct the estimation, it is called the true-up adjustment.
Reason for True-Up Adjustment
- Lack of information: The true-up aims to adjust the previous transaction made in the past. At that time, we make accounting record base on the information available, so it leads to overstate or understate the actual value. Subsequently, we use the true-up adjustment to correct it when the information is cleared.
- Different Timing: Different timing lead to different judgment and assumption.
- Accounting Error: Sometimes the information is enough, but we make some errors in supporting our estimation.
- Budgeting: some businesses use the budget to record the expense and it is highly likely to be over or understate.
Example of True-Up Adjustment
Company ABC Co,. Ltd accrues the audit fee for the year-end 202X for 20,000 bases on the prior year invoice. However, the company sign contract with the auditor which cost $ 22,000 due to the new update of accounting standards and requirements from the local government.
Journal Entries:
- 31 Dec 202X: We estimate the audit fee base on the prior year data.
| Account | Debit | Credit |
|---|---|---|
| Audit Expense | 20,000 | |
| Accrued Liability | 20,000 |
- 31 Mar 202X+1: The figure is actually as we already signed a contract with the auditor. Assume the company makes payment in March. So we have to reverse the accrued liability.
| Account | Debit | Credit |
|---|---|---|
| Accrued Liability | 20,000 | |
| Cash | 20,000 |
- Besides that, we have to record additional expense which is the true-up adjustment to increase the audit expense to $ 22,000.
| Account | Debit | Credit |
|---|---|---|
| Audit Expense | 2,000 | |
| Cash | 2,000 |
