What do negative variances indicate?

Definition of Negative Variances on Accounting Reports

Negative variances are the unfavorable differences between two amounts, such as:

  • The amount by which actual revenues were less than the budgeted revenues
  • The amount by which actual expenses were greater than the budgeted expenses
  • The amount by which actual net income was less than the budgeted net income
  • The amount by which current revenues were less than the previous year's revenues
  • The amount by which actual expenses were greater than the previous year's expenses
  • The amount by which the actual net income was less than the budgeted net income

The negative variances, which are unfavorable in terms of a company's profits, are usually presented in parentheses. On the other hand, positive variances in terms of a company's profits are presented without parentheses.

Examples of Negative Variances on Accounting Reports

Assume that a company had the following following information for a recent month:

  • Budgeted revenues of $30,000
  • Budgeted expenses of $22,000
  • Budgeted net income of $8,000
  • Actual revenues of $28,500
  • Actual expenses of $20,800
  • Actual net income of $7,700

Based on the above information, the company's will be reported as shown here:

  • Revenues variance: ($1,500). The amount is a negative or unfavorable variance because the actual revenues were $28,500 instead of the budgeted revenues of $30,000. The difference of $1,500 is unfavorable for the company's profitability.
  • Expenses variance: $1,200. The amount is a positive or favorable variance because the actual expenses of $20,800 are less than the budgeted expenses of $22,000. The difference of $1,200 is favorable for the company's profitability.
  • Net income variance: ($300). The amount is a negative or unfavorable variance because the actual net income of $7,700 is less than the budgeted net income of $8,000. The difference of ($300) is an unfavorable outcome for the company. The amount also agrees with the combination of the unfavorable revenues variance of ($1,500) and the positive expenses variance of $1,200.

To assist the readers of the accounting reports with variances being reported to indicate on the report: "( ) = an unfavorable effect on net income."