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What do negative variances indicate?

Author:
Harold Averkamp, CPA, MBA

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.”

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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