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    Accounting Standards Library
    Wednesday
    Apr062011

    What is an over accrual?

    An over accrual is a situation where the estimate for an accrual journal entry is too high. This estimate may apply to an accrual of revenue or expense. Thus, an over accrual of revenue will result in an excessively high profit in the period in which the journal entry is recorded, while an over accrual of an expense will result in a reduced profit in the period in which the journal entry is recorded.

    An accrual is usually set up as a reversing entry, which means that the exact opposite of the original entry is recorded in the accounting system at the beginning of the next accounting period. When an over accrual is recorded in one period, this means that the reversing entry causing the reverse effect applies in the next accounting period. Thus:

    • If there is an over accrual of $500 of revenue in January, then revenue will be too low by $500 in February.
    • If there is an over accrual of $1,000 of an expense in January, then the expense will be too low by $1,000 in February.

    An over accrual is not good from the perspective of the auditor, since it implies that a company's accounting staff is not able to properly estimate the amounts of revenues and expenses for which it is creating accruals.

    The presence of over accruals can be combatted by only making an accrual entry when the amount to be recorded is easily calculated. If the amount is subject to fluctuation, the most conservative figure should be recorded.

    Example of an Over Accrual

    ABC International's accounting staff estimates that the amount of its phone bill for the month of April will be $5,500, which is based on a recent history of approximately that amount per month over the past few months. The accounting staff accordingly creates the following entry, which it sets up as an automatically reversing entry:

      Debit Credit
    Telephone expense 5,500  
          Accrued expenses (liability)
      5,500


    At the beginning of the next month (May), the accounting system generates a reversing entry, which is:

      Debit Credit
    Accrued expenses (liability)
    5,500  
          Telephone expense
      5,500


    Finally, later in May, the phone company sends ABC the April phone bill in the amount of $4,250. The invoice is reduced because of a combination of a rate decrease and ABC having fewer land lines in use. The entry is:

      Debit Credit
    Telephone expense 4,250  
          Accounts payable
      4,250


    Thus, ABC initially creates an accrual of $5,500 that exceeds the actual amount of the expense by $1,250. The over accrual creates $1,250 too much expense in April, and $1,250 too little expense in May.

    Related Topics

    The accruals concept
    What are accrued expenses?
    What is a reversing entry?
    What is an under accrual?
    Where do accruals appear on the balance sheet? 

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