It should surprise no one that “actuals” are what really matters in business. They are the numbers reported in financial statements, tax returns and compliance documents. But when managers talk about actuals, they’re usually referring to the role they play in business analyses. Businesses need to plan, so they produce budgets and forecasts against which actual results are later compared and analyzed, improving managers’ ability to understand what is going wrong or right with the business. Further, to paint the most accurate possible financial picture of the business at any point in time, accountants cannot always wait for expected transactions to occur before recording the activity they represent. So, accountants make estimates, accruals and deferrals that must later be “trued-up” with actual results.
For all these reasons, recognizing actual revenue and costs is an essential part of accounting for any business. Using actuals to measure the accuracy of budgets, revise forecasts and bring expectations into line with current operational or market realities can help a company analyze and adjust targets for sales, production or other parts of the business. Accounting and financial planning departments use actuals to refine estimates of business costs. Variances revealed when actuals are compared to prior estimates are used to predict a business’s profitability and performance. And reconciling actual revenue and costs against what had been anticipated can help businesses continuously monitor cash flows, set benchmarks and define goals.
What Are Actuals in Accounting?
The accounting definition of actuals is just that: the amount of money that was actually received from a customer or paid for something purchased by a business. For small businesses that use cash-basis accounting, actuals are the only thing they ever record; for them, analyzing the differences between their actuals and their budgets and forecasts are the only use of actuals. When contrasted with estimates, actuals depict the business’s current financial position in a way that enables management to see what really happened versus what was expected. The larger the variance, the bigger the signal to dive in and make operational changes, as opposed to staying the course.
Most companies, however, use accrual-basis accounting. For them, variance analysis is just as important as it is for cash-basis companies, and in the same ways. But accrual-basis accounting requires these companies to put estimates in their books at the moment revenue is earned or expenses are incurred, as placeholders for the future transaction in which that revenue is actually received or the expense is actually paid. When that occurs, additional accounting entries true-up the books, replacing the placeholders with the actuals.
- Actuals in accounting are the real payments and revenue that are paid out or collected by a business.
- Companies compare actuals against forecasts and budgets to inform key decisions about the efficiency, sustainability and profitability of their operations.
- Using actuals as part of a monthly variance analysis enables stakeholders to identify risks to the business or to make changes in operations that help consistently refine data inputs and improve predictions.
- Actuals are what actually matters: They are the values reported in financial statements, tax filings and other compliance documents. So, it’s important to get them right.
Actuals in Accounting Explained
Tracking actual amounts for both revenue and expense is an essential basic accounting task for any business. Monitoring actuals helps inform a variety of business decisions, such as sourcing, production, labor and pricing. For example, supply chain disruptions may lead to higher costs than expected for raw materials, resulting in a negative variance in product profit. To adjust for this cost, a company may decide to pass the increase on to its customers by raising prices or adjust its forecasts to reflect lower profitability in the future.
Companies use actuals to:
- Adjust budgets going forward by comparing actuals against expectations.
- Identify significant revenue or expense gaps and quickly make changes, if needed.
- Analyze expenses and revenues and revise estimates to improve forecasting accuracy.
- Report to stakeholders and pay taxes.
How Do Actuals Work?
Actuals work by informing company managers about what’s really happening at the transactional level of their business. The actuals associated with transactions — the receipt of money from a customer or payment of a bill to a supplier — are recorded at the time the payment is sent or the revenue is received. This impacts cash-basis and accrual-basis companies differently. The reason is that the exchange of money for goods and services does not always happen at the time a service is rendered or the goods are acquired. In such situations, a company using accrual accounting requires its bookkeepers to record estimates using accruals or deferrals. These estimates are later “reversed” when the actuals occur, using journal entries that essentially cancel the estimates, replace them with the actuals and leave only the actuals on the books.
The process of accruals, deferrals and reversals (when actuals are recorded) is necessary to the matching and revenue recognition principles inherent in U.S. Generally Accepted Accounting Principles (GAAP). The matching principle requires that expenses be recognized in the same period as the revenue they help generate. The revenue recognition principle requires that revenue be recognized when it is earned — in other words, when a business performs the actions that entitle it to the revenue. For example, suppose an accrual-basis company earns $1,000 in revenue from a customer in March and, therefore, recognizes it as first-quarter revenue. But the customer pays the $1,000 invoice in April. When the company records the actual April payment to its cash account, it also makes a corresponding negative entry of $1,000 against its accounts receivable account. Thus, the net effect on the company’s books in April is zero ($1,000 – $1,000), leaving only the $1,000 in revenue originally recognized in March, the month in which it was earned.
It’s important to know that variances in anticipated costs or sales amounts can and do occur. Analyzing a comparison of accruals and actuals can help a business understand its cash inflows and outflows and identify how the business is performing, compared to its plan, at any given point in time. For example, a portion of a parts order may no longer be available, making the supplier’s invoice lower than expected, or a customer emergency may mean a technician’s travel expense becomes higher than planned. In these cases, the variances would be analyzed to determine how business and strategic decisions could be impacted going forward. Capturing project actuals accurately, and in a timely manner, is essential, and doing a deep dive into circumstances can inform future plans.
Actuals vs. Budget
A comparison of actual costs to a company’s budget is called variance analysis. Accounting and financial planning and analysis (FP&A) departments use actuals during their variance analyses to continuously evaluate the performance of the business and interpret the company’s results. Comparing actual revenue and expenses to the original plan or project proposal can reveal shifts in sales or production; management can then determine whether course correction is needed. It can also be a heads-up that a business is on the verge of overspending. These types of analyses may be referred to as “Budget vs. Actual” or “Forecast vs. Actual” analyses.
Actuals are also useful as part of a rolling forecast. For example, a 12-month forecast might be prepared at the beginning of the calendar year. As each month’s expenses and revenue actually happen, the forecast for that month is replaced by the actuals. Management may decide to review the full-year forecast at the end of March, evaluating the three months of actuals vis-à-vis the original forecast for those months, along with the plans for the nine months left in the forecast. If the actuals are trending above or below the forecast, managers may decide to make corresponding operational changes or choose to stay the course. Companies use actuals reports to constantly monitor current conditions and revise forecasts that were based on historical and other data, and they use variance analyses as the place to start a conversation about what is going right or wrong with the business. Variance analyses can also help identify inadvertent mistakes or uncover potential fraud and irregularities in financials or operations.
How to Read a Budget vs. Actuals Report
Reading a budget vs. actuals report is an essential skill for decision-makers trying to evaluate the position of their business against their original plans. Ideally run monthly, this variance analysis typically adheres to a standard set of inputs, which track actuals; the analysis then calculates the variance between the actuals and the budget in terms of dollars and percentages, helping senior managers easily detect emerging positive or negative trends. Budget vs. actual reports commonly start on the left with columns for actual and budgeted amounts, then show the difference between the two, as represented in dollar value and percent of budget.
In the simplified fictional report shown below, sales for ABC Company were expected to bring in $4,000 for its new product and require $3,500 in expenses. Actual sales of $5,000 were recorded, along with higher expenses of $4,200. The budget vs. actual report reflects both the $1,000 by which sales exceeded the budgeted amount and the $700 increase in expenses. Because the increase in sales value was greater than the positive variance in expenses, profit rose, too.
ABC Co. Budget vs. Actuals Report
It is typical to reflect positive variances without parentheses and negative variances either with a minus before the number or in parentheses. It’s important to understand that not all positive variances are favorable for a business, just as all negative variances aren’t necessarily unfavorable. Context is always important, because a positive variance may be caused by an unfavorable business situation and vice versa. For example, the positive variance in the expense line for ABC Company, compared to its budgeted expenses, might be considered unfavorable at first — until the analyst learns it is actually due to increased sales and results in higher profits. FP&A professionals use the budget vs. actuals report to dig deeper into the factors that might have caused the variances, and they communicate their findings with senior management so that action can be taken, if needed.
Actuals vs. Accruals
While actuals can be described as the money received for sales or the cash paid for expenses, accruals are a bookkeeping placeholder to recognize revenue earned or expenses incurred in the correct fiscal period, regardless of when the cash payments are made. Expense accruals generally occur when services are rendered but not yet paid for, or when supplies are purchased on credit.
For example, a business may receive office supplies in January but not pay the bill until the invoice arrives the following month. Under accrual-basis accounting, the expense is recorded as occurring in January, even though the payment will not be made until February. Similarly, a business may record sales orders fulfilled in March but purchased on credit, so they won’t be billed for and collected until May. Replacing accruals with actuals in the month the monies are actually received requires a reversal of journal entries.
Accrual-basis accounting is the only method of accounting that is GAAP-compliant, and it is a necessity for public companies and those that seek bank loans. It’s more complicated and labor-intensive than cash-basis accounting, potentially increasing the risk of mistakes. Creating accurate financial reports, preferably through an automated process, will improve the overall quality of a business’s accounting data, improve efficiency and, if something looks amiss, highlight issues more quickly.
Comparing Accruals vs. Actuals
|An "accrual" is a record of a business's revenue made when it is earned (regardless of when the customer pays), or a record of an expense made when it is committed (regardless of when the expense is paid).
|A website records revenue earned as accounts receivable when banner advertisements are displayed to site visitors. A computer manufacturer records expenses incurred when it accepts delivery of microchips from a supplier.
|An "actual" is a record of a business's revenue made when the cash is received from the customer, or a record of an expense made when the cash is paid to the supplier.
|A website records an increase in cash when an advertising customer pays its bill and reverses a prior accounts receivable accrual. A computer manufacturer debits its cash account when sending payment for previously received microchips and reverses a prior expense accrual.
Actuals are the real expenses incurred or revenues received in the operation of a business. Unlike estimates, actuals provide a true picture of costs and income.
Here’s an example. A clothing company may estimate that replacing a large stitching machine will cost $2,200, but the actual cost ends up being $3,400 due to unanticipated special wiring that was required. The business could not have estimated the actual cost until the expenses were incurred during the installation, and it will now see a negative, or unfavorable, variance when compared to the budgeted expenses for that period.
On the revenue side, an auto parts store may estimate selling 20,000 snow scrapers in March, based on last year’s figures. However, several late season storms result in the sale of 40,000 units. The business will see a positive, or favorable, variance from the forecasted revenue for that month.
In both examples, the tracking of actuals to budget will prompt questions about what caused the variances. Minor variances are to be expected, but a major difference should be looked at more closely by business leaders. Once the cause of the sales or spending variance is determined, forecasts can be modified and/or corrective actions taken to reduce the size of the gap in the future.
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Capturing actuals as part of a company’s accounting operations is essential for accurate reporting and analysis of business operations. Automating this process using NetSuite Cloud Accounting not only improves the timeliness and accuracy of capturing expenses and revenue, but it also speeds time to analysis by creating a central repository of transactional data. Using real-time dashboards, accounting and FP&A departments can access variance analyses without even waiting for period closes. NetSuite accounting lets you generate reports at any time to help identify the business’s performance gaps.
Tracking actual expenses and revenue is a critical accounting practice that helps companies grasp the true impact of running their business. When matched against forecasted budgets, actuals help business leaders gain the data they need to make informed decisions about their business’s performance, while providing cash flow visibility. Analyzing the differences between budgeted and actual expenses and revenue allows stakeholders to make informed decisions about when to revise forecasts, how to improve efficiency and predict profitability and, if needed, find ways to resolve problematic issues swiftly.
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Actuals in Accounting FAQs
What types of variances can you analyze in a budget vs. actual report?
Variances between budgeted and actual revenue/expenses are quickly identifiable in a budget vs. actual report. At the highest level, managers should be examining variances in revenue and spending as compared to budget estimates. Key components of a business, such as revenue trends, materials costs, labor or an unexpected or one-time purchase, could all cause variances that might require operational adjustments or a revised forecast. In a larger sense, any line item in a business budget can be analyzed in a budget vs. actual report.
What is actualization in finance?
Actualization is the method of overwriting closed accounting periods or revising forecasts with actual asset, liability, equity, revenues and expenses. Variances provide insights into business operations when directly compared to budgets or forecasts.
What are monthly actuals?
Monthly actuals are the realized expenses or revenues for a given month. As part of a variance analysis, monthly actuals highlight the difference between a benchmark, such as a budget or forecast, and actual spending or receipts. Monthly reviews can pinpoint actionable financial issues before they turn into larger problems.
What does actual mean in economics?
In economics, “actual” means current levels of output, compared to estimated or potential output of a given economy. Similar to variance analysis in accounting, economists look at the difference between potential output and actual output to see how resources are being utilized and whether an economy is operating at its full potential. The difference is called an output gap.
What are actuals in data?
Actuals in data are the inputs that reflect the real expenditures or revenues a company realized. Actuals are the transaction data used to compare against estimates as part of a budget or forecasting process. Having strong, historical financial data improves the accuracy of future budgets.