What is Over Accrual?

Over Accrual

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Over Accrual

An over accrual occurs when the accrued expense recorded in the books of accounts is more than the actual expense incurred.

Accrual is an accounting principle that records revenues and expenses when they are earned or incurred, irrespective of when the cash transaction occurs. In some situations, the exact amount of an expense may not be known, so an estimate is used for accrual purposes. When the actual bill arrives and it turns out to be less than the estimated amount, an over accrual has occurred.

For example, suppose a company estimates and accrues $5,000 for utility costs in December but doesn’t receive the bill until January. When the bill arrives, it turns out the actual cost was $4,700. In this case, the company over accrued its utility expense by $300.

An over accrual needs to be adjusted in the accounting records to match the actual expense amount. In the example above, the company would need to reduce its utility expense by $300 to correctly represent its utility cost. The correcting entry would be a debit (decrease) to accrued expenses and a credit (decrease) to utility expense for $300.

Example of Over Accrual

XYZ Company provides IT services and pays an external vendor for server maintenance. At the end of each quarter, the company accrues an estimated $10,000 for these services. This estimate is based on their historical costs.

At the end of Q1, XYZ Company makes the following entry in their accounts:

Debit: Server Maintenance Expense $10,000
Credit: Accrued Expenses $10,000

However, when the invoice arrives from the vendor in early Q2, the actual server maintenance expense for Q1 turns out to be $8,500. The company has therefore over-accrued the server maintenance expense by $1,500.

To correct this, XYZ Company will need to make an adjusting entry in Q2:

Debit: Accrued Expenses $1,500
Credit: Server Maintenance Expense $1,500

The effect of this adjusting entry is to reduce both the Server Maintenance Expense and the Accrued Expenses accounts by $1,500, thus bringing the accounts in line with the actual cost incurred.

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