What is an under accrual?

An under accrual is a situation where your estimate of the amount of an accrual journal entry is too low. This scenario can arise for an accrual of either revenue or expense. Thus, an under accrual of an expense will result in more profit in the period in which the entry is recorded, while an under accrual of revenue will result in less profit in the period in which the entry is recorded.

An accrual is typically created as a reversing entry in the accounting software, so that the opposite of the original entry is recorded at the beginning of the following accounting period. This means that an under accrual in one period leads to the reverse effect in the next accounting period. Thus:

• If there is an under accrual of $2,000 of revenue in April, then revenue will be too high by $2,000 in May.
• If there is an under accrual of $4,000 of an expense in April, then the expense will be too high by $4,000 in May.

Auditors are always watching for potential under accruals of expenses, on the grounds that this creates too great a profit in the period being compiled, reviewed, or audited.

Example of an Under Accrual

ABC International's accounting staff estimates that the billing from a key materials supplier will be $50,000 based on the amount of goods shipped to the company during the past month (April). The accounting staff uses this estimate to create a cost of goods sold accrual for $50,000, and sets it up as an automatically reversing entry, as follows:

	Debit	Credit
Cost of goods sold expense	50,000
Accrued expenses (liability)		50,000

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

	Debit	Credit
Accrued expenses (liability)	50,000
Cost of goods sold expense		50,000

Later in May, the supplier sends ABC its April invoice for $60,000. The invoice is higher than expected, because ABC's accounting staff did not account for a large delivery from the supplier. The entry is:

	Debit	Credit
Cost of goods sold expense	60,000
Accounts payable		60,000

Thus, ABC initially creates an accrual of $50,000 that is lower than the actual amount of the cost of goods sold by $10,000. The under accrual creates $10,000 too much profit in April, and $10,000 too much expense in May.

Related Topics

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