What is a True Up in Accounting? Definition and Examples
True Up Meaning
In accounting, a true up is a reconciliation to adjust a previously recorded value to match the actual, often more accurate, amount.
Simply put, it is often the case that an estimated value is replaced by the genuine value.
This adjustment is important to ensure that the financial statements reflect the most current and accurate information.
True Up Examples
Let’s now explore some examples of a true up in accounting to help further understanding:
Accruals True Up
A manufacturing business accrues utility expenses based on estimates each month, and receives the actual invoice quarterly.
The true up adjustment will replace the estimated utility cost with the actual cost billed on the invoice.
Inventory True Up
A large warehouse records inventory values based on estimates and sales/returns information.
Due to the sheer volume of items in the inventory, it isn’t possible to conduct a physical inventory count each month, so it is performed at the end of every half year.
Therefore, the true up will adjust the estimated recorded inventory value with the actual physical total.
Bonus True Up
A company pays a discretionary bonus based on hitting certain performance metrics throughout the year, and accrues for this each month.
A year end, the company calculates the true up payment that they expect to pay out as a bonus to align with the actual performance.
Bad Debt Provision True Up
An online retailer that sells products on credit estimates and records a provision for bad debts based on historical data.
At year end, the actual bad debt performance is reviewed and the provision for bad debt is adjusted to match the actual bad debt losses.
True Up of Errors
A business that uses straight line depreciation has identified an error in the accounts.
The monthly depreciation expense was calculated using a useful life of 6 years instead of 5 years.
A true up charge is posted in the accounts to rectify this error and charge the ‘missing’ depreciation.
True Up Accounting Journal Example
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Month 1
At the end of month 1, the accountant posts an accrual of £1,000 for electricity costs, based on the last quarterly invoice of £3,000.
Utility Costs (P&L) | Debit | £1,000 |
Accruals (Balance Sheet) | Credit | £1,000 |
Month 2
At the end of month 2, the quarterly invoice still isn’t due.
Therefore, the accountant posts another accrual of £1,000 for the electricity costs, which now stands at £2,000 in total.
Utility Costs (P&L) | Debit | £2,000 |
Accruals (Balance Sheet) | Credit | £2,000 |
Month 3
At the end of month 3, the quarterly invoice is due, but hasn’t been received.
So again, the accountant posts another accrual of £1,000, so the quarterly total now stands at £3,000.
Utility Costs (P&L) | Debit | £3,000 |
Accruals (Balance Sheet) | Credit | £3,000 |
Month 4
In month 4, the invoice has been received for £3,200, slightly higher than the anticipated £3,000, and gets paid.
The accrual will be reversed, an extra £200 will be trued up for the utility cost and £3,200 will credited from the bank account.
Utility Costs (P&L) | Debit | £3,000 |
Accruals (Balance Sheet) | Debit | £3,000 |
Utility Costs (P&L) | Debit | £200 |
Bank/Cash (Balance Sheet) | Credit | £3,200 |