True-up in accounting: expert tips, industry examples, and best practices

In accounting, the accuracy and credibility of financial information is paramount. But due to timing differences, budgeting differences, or even human error, financial accounts can display figures that are out of line with actual amounts. This is where so-called “true-up” adjustments come in. 

In this article, we’ll explain everything you need to know about true-up in accounting, covering: 

• How it works
• Industry examples
• Challenges, considerations, and best practices
• Answers to frequently asked questions

But before we dive into the details, let’s start with a definition. 

What is true-up in accounting?

“True-up” refers to the process of reconciling estimated or inaccurate amounts with actual up-to-date figures. This process typically takes place at the end of an accounting period, such as a quarter or a year. 

As the name suggests, true-ups sync financial statements with reality, ensuring that they accurately reflect the true financial position and performance of a company. 

The mechanics of a true-up entry

A true-up entry is an adjustment made in a company’s accounting records and general ledger to reconcile a mismatch between two or more accounts. 

The process of adding a true-up entry involves various key steps, including identifying discrepancies, calculating variances, preparing and recording the true-up entry, and reconciling all relevant accounts. 

Examples of true-up entries in various accounting scenarios

In this section, we’ll look at the different scenarios that can lead to discrepancies between accounts, resulting in the need for true-up adjustments.

Budgeting differences

Actual performance and outcomes often deviate from estimates and projections, due to factors such as changing market conditions, unexpected expenses, or shifts in business strategy. 

Likewise, businesses may accrue operational expenses for things like utilities based on estimates but pay the actual invoice once a quarter. Both these examples can lead to discrepancies between estimated amounts and actual ones. 

To reconcile these differences in the accounts, accountants need to make true-up entries. This may involve adjusting revenue, expenses, or other financial metrics. 

Timing differences

Sometimes, transactions are recorded in different accounting periods to when they were actually incurred or received, often due to the timing of billing or delivery. True-up entries are required here to ensure that financial statements reflect the periods in which they occurred. 

For example, if a company realizes some revenue in the first quarter of the year based on estimates but the actual delivery of goods or services happens in the second quarter, an accountant will need to make a true-up entry to adjust revenue recognition accordingly.

Quantification

Businesses face many uncertainties and unforeseen events that can negatively impact financial outcomes — everything from regulatory changes to natural disasters. Despite careful planning, it’s impossible to effectively predict and budget for all eventualities. 

When actual outcomes diverge from initial forecasts due to factors outside the company’s control, accountants must make adjustments through true-up entries to bring the accounts in line with reality.

Errors and omissions

Mistakes can be made during the recording or processing of financial transactions, especially when performed manually. Examples include data entry mistakes, calculation errors, or misinterpretation of accounting principles. 

Accountants can correct such errors using true-up entries. This process involves detecting the error, adjusting the affected accounts to reflect the correct amounts, and documenting the correction process for audit purposes.

Challenges and considerations in true-up accounting

Like any accounting procedure, true-up adjustments come with plenty of potential challenges and issues to consider. We’ll cover some key examples in this section.

Data availability and accuracy

One of the primary challenges is ensuring that the data you are using to make true-up adjustments is accurate and relevant. If your data is incomplete or inaccurate, the reconciliation process will be hindered, leading to incorrect adjustments.

Complexity of transactions

Business transactions can be complex, involving multiple variables and accounting treatments. Understanding the intricacies of these transactions and applying the appropriate accounting principles to make accurate adjustments can be a challenge for even the most seasoned accountants.

Time constraints

True-up adjustments are typically made at the end of an accounting period, with accountants often working under tight deadlines to meet reporting requirements. This time pressure can increase the risk of oversights and errors, potentially leading to inaccurate or even missed adjustments.

Changes in accounting standards

Not only are accounting standards and regulations complex, but they are also subject to change. Staying on top of the latest changes and how they impact true-up adjustments requires time and continued learning. 

Interpretation of guidance

Interpreting accounting guidance and applying it to specific transactions can be challenging. Differences in interpretation among accounting professionals may lead to inconsistencies in true-up adjustments.

Best practices for true-up accounting

To help you overcome the typical challenges outlined above and improve your true-up entry process, here are some best practices to follow.

Establish clear procedures

Develop clear procedures and guidelines for conducting true-up entries, outlining the steps accountants should follow, key roles and responsibilities, documentation requirements, and approval processes. This should be seen as part of a wider move to standardize accounting policies and procedures across the organization to ensure consistency in financial reporting.

Maintain accurate records

Ensure that all financial transactions and adjustments are accurately recorded in the accounting system, with appropriate supporting documentation and explanations for true-up entries. Besides providing visibility and transparency for your team, this will also help you maintain an audit trail and meet regulatory requirements.

Utilize automation and technology

Manual processes are slow and prone to error. Leveraging automation tools, accounting software, and practice management software can help you: 

• Streamline true-up entry processes and accounting workflows in general
• Enhance consistency in financial reporting
• Reduce manual errors

Internal review and approval

Implement a robust approval process for true-up entries, involving multiple levels of review to enhance accuracy and accountability. 

Continuous improvement

Foster a culture of continuous improvement within the finance department, seeking feedback from staff, evaluating processes, and implementing changes to enhance the efficiency and effectiveness of your true-up entry process. Offer regular training and education on accounting principles, standards, and best practices to minimize errors and ensure consistency.

True-up FAQs

Before we wrap this up, let’s go through some frequently asked questions to cover all our true-up bases. 

What is the purpose of a true-up adjustment in accounting?

True-up adjustments ensure that accounts are in sync with reality by correcting any discrepancies caused by initial estimates or inaccurate figures. This helps to ensure the accuracy and completeness of financial statements.

How does a true-up entry differ from a regular accounting adjustment?

True-up entries address discrepancies between previously recorded amounts and actual figures recorded in financial statements, whereas regular accounting adjustments may be made to correct errors, reclassify transactions, or apply accounting principles.

What are the key steps involved in making a true-up adjustment?

The key steps in making a true-up adjustment typically include:

• Identifying discrepancies between estimated amounts and actual figures
• Analyzing the nature and impact of the discrepancy
• Calculating the necessary adjustment amount
• Documenting the rationale and supporting evidence for the adjustment
• Reviewing and approving the true-up entry
• Recording the adjustment in the financial statements

How do true-up entries impact financial statements and reporting?

True-up entries impact financial statements by ensuring that reported figures accurately reflect the company’s financial position, performance, and cash flows. This enhances the reliability and credibility of financial statements.

What are some common challenges associated with true-up accounting?

Common challenges associated with true-up accounting include the availability and accuracy of data, complexity of transactions, uncertainty around estimations and forecasts, time constraints, changes in accounting standards, interpretation of guidance, and human error.

How can technology assist in managing true-up adjustments more efficiently?

Technology can help enhance and streamline the true-up entry process in the following ways: 

• Automating repetitive tasks
• Facilitating data analysis and reconciliation
• Enhancing collaboration and communication
• Providing real-time insights and reporting capabilities
• Ensuring compliance with accounting standards and regulations

Are there industry-specific considerations for true-up accounting?

Yes, there may be industry-specific considerations for true-up accounting, depending on the nature of the business and the types of transactions involved. For example, industries with complex revenue recognition requirements, such as software or construction, may have unique challenges and considerations for true-up adjustments.

What best practices should I follow to ensure accurate true-up entries?

True-up best practices include:

• Establishing clear procedures and guidelines
• Maintaining accurate records
• Conducting regular reconciliations
• Adhering to accounting standards
• Completing true-up entries in a timely manner
• Implementing robust review processes
• Documenting changes and revisions
• Utilizing technology effectively 
• Fostering a culture of continuous improvement and collaboration

Conclusion

The importance of true-up adjustments in maintaining the integrity of financial statements cannot be overstated. By reconciling previously recorded or estimated amounts with actual figures, true-up adjustments ensure accuracy, transparency, and compliance. 

We hope you’ve found this guide useful, giving you the information you need to tackle true-up entries with confidence.