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."
