Meaning
Reconciliation accounting procedures resolve the discrepancy between estimated provisional payments and the final verified cost of goods or services. A true up adjustment typically occurs at the end of a fiscal quarter or annual reporting period when actual production volumes are known. Parties in a manufacturing supply chain use this mechanism to settle the difference between a budgeted price and the actual landing cost of raw materials.
Contractual Mechanism
Purchase price formulas often include a provision for these periodic corrections to protect both the supplier and the buyer from market volatility. The true up adjustment prevents the accumulation of large debt or credit balances between related parties in a global logistics network.
Transfer Pricing
Related party transactions must be reconciled to ensure that the final profit margins align with the arms length principle required by Chinese tax law. A true up adjustment corrects the intercompany pricing after the close of the year so that the local entity reports an appropriate level of taxable income.
Year End Closure
Financial accuracy is maintained through the systematic application of these settlements during the audit of the company books. The true up adjustment ensures that the reported inventory values and cost of goods sold are based on actual expenditures rather than initial estimates.
