GL - Errors & Reversals

GL - Errors & Reversals

Explore the concept of journal reversals and understand the business scenarios in which users may need to reverse the accounting entries that have been already entered into the system. Understand the common sources of errors resulting in the reversal of entries and learn how to correct them. Discuss the reversal of adjustment entries and the reversal functionalities in ERPs.

 Discovery of Errors in Accounting Books:

It is obvious that care should be used in recording transactions in the journal and in posting to the accounts. The need for accuracy in determining account balances and reporting them to the business stakeholders is also evident.

In the practical world, errors will sometimes occur in journalizing and posting transactions. In some cases, however, an error might not be significant enough to affect the decisions of management or others. In such cases, the materiality concept implies that the error may be treated in the easiest possible way. For example, an error of a few dollars in recording an asset as an expense for a business with millions of dollars in assets would be considered immaterial, and a correction would not be necessary. However, in case the error is significant and material then it needs to be corrected. In the case of automated systems and ERPs, the general practice is to correct all identified errors.

Causes of Errors:

Some of the most common errors in the recording and posting steps are described below:

  1. Failure to record a transaction or to post a transaction.
  2. Recording the same erroneous amount for both the debit and the credit parts of a transaction.
  3. Recording the same transaction more than once.
  4. Posting a part of a transaction correctly as a debit or credit but to the wrong account.
  5. Posting the transaction not in accordance with the accounting principles
  6. Source system errors creating wrong transactions in General Ledger
  7. Wrong period errors, prior period items getting posted in the current period
  8. Interface errors, sub-ledger feed is omitted or is posted twice
  9. Coding errors – erroneous data is automatically created and posted.
  10. Exchange Rate Errors- the system has picked up a wrong exchange rate that needs to be corrected
  11. Account balance errors
  12. The wrong amount posted to an account.
  13. Debit posted as credit, or vice versa.
  14. Debit or credit posting omitted.
  15. Posting errors

Correction of Errors by Reversals:

The procedures used to correct an error vary according to the nature of the error, when the error is discovered, and whether a manual or computerized accounting system is used. Oftentimes, an error is discovered as it is being journalized or posted. In such cases, the error is simply corrected. For example, computerized accounting systems automatically verify for each journal entry whether the total debits equal the total credits. If the totals are not equal, an error report is created and the computer program will not proceed until the journal entry is corrected.

Occasionally, however, an error is not discovered until after a journal entry has been recorded and posted to the accounts. Correcting this type of error is more complex. In the automated systems the journal cannot be edited or deleted once it has been posted.  After the posting process has happened, the only way to correct the errors is to reverse the original transaction that nullifies the accounting impact of the wrong Journal and create a new journal with the correct accounting data.

In Automated Accounting Systems, it is not possible to delete transactions once the posting has been made. In such systems reversals is the recommended way to correct the erroneous entries.  An example is that one interface feed has been posted by mistake twice. This has inflated many income expense accounts. A reversing entry with opposite debit and credit amounts to all the impacted accounts will nullify the impact of the mistake.

Reversal of Adjustment Entries:

At the beginning of each accounting period, there is an accounting practice to use reversing entries to cancel out the adjusting/accrual entries that were made to accrue revenues and expenses at the end of the previous accounting period. The use of Reversing Entries makes it easier to record subsequent transactions by eliminating the possibility of duplication.

  • Reversing entries are made on the first day of an accounting period in order to offset adjusting accrual/provision entries made in the previous accounting period.
  • Reversing entries are used to avoid the double booking of revenues or expenses when the accruals/provisions are settled in cash.
  • A reversing entry is linked to the original adjusting entry and is written by reversing the position of debits with credits and vice versa.
  • The net impact of Original Entry and Reversing Entry on the accounting books is always zero.

Automatic Reversals:

Large organizations need to routinely generate and post large numbers of journal reversals as part of their month-end closing and opening procedures. Automated journal reversals save time and reduce entry errors by automatically generating and posting journal reversals. Users generally need to define journal reversal criteria which are the reversal business rules for journal categories or classes along with the reversal method, period and date. The journal will be reversed based on the method, period, and date criteria defined for that journal category/class when a new accounting period is opened.

Related Links

Creation Date Tuesday, 30 November -0001 Hits 13615

You May Also Like

  • GL - Adjustment Entries

    GL - Adjustment Entries

    In this article, we will describe how to determine if an account needs adjustment entries due to the application of the matching concept. Learners will get a thorough understanding of the adjustment process and the nature of the adjustment entries. We will discuss the four types of adjustments resulting from unearned revenue, prepaid expenses, accrued expenses, and accrued revenue.

  • What is a Business Eco System?

    What is a Business Eco System?

    The goal of a business is to generate capital appreciation and profits for its owners or stakeholders by engaging in provision of goods and services to customers within the eco system/framework governed by respective laws(local/international).  The eco system involves various entities that the business works with for delivery of a product or service.

  • Example of Subsidiary Ledgers

    Example of Subsidiary Ledgers

    In this article, we explain some commonly used subsidiary ledgers like accounts receivable subsidiary ledger, accounts payable subsidiary ledger or creditors' subsidiary ledger, inventory subsidiary ledger, fixed assets subsidiary ledger, projects subsidiary ledger, work in progress subsidiary ledger, and cash receipts or payments subsidiary ledger. 

  • Shared Services Model

    Shared Services Model

    Shared Services is the centralization of service offering at one part of an organization or group sharing funding and resourcing. The providing department effectively becomes an internal service provider. The key is the idea of 'sharing' within an organization or group. 

  • The Accounting Cycle

    The Accounting Cycle

    Learn the typical accounting cycle that takes place in an automated accounting system. We will understand the perquisites for commencing the accounting cycle and the series of steps required to record transactions and convert them into financial reports. This accounting cycle is the standard repetitive process that is undertaken to record and report accounting.

  • GL - Journal Posting and Balances

    GL - Journal Posting and Balances

    In this tutorial, we will explain what we mean by the posting process and what are the major differences between the posting process in the manual accounting system compared to the automated accounting systems and ERPs. This article also explains how posting also happens in subsidiary ledgers and subsequently that information is again posted to the general ledger.

  • Operational Structures in Business

    Operational Structures in Business

    Large organizations grow through subsidiaries, joint ventures, multiple divisions and departments along with mergers and acquisitions. Leaders of these organizations typically want to analyze the business based on operational structures such as industries, functions, consumers, or product lines.

  • General Ledger Process Flow

    General Ledger Process Flow

    In this article, we will explain the general Ledger journal processing flow from entering journals to running the final financial reports. Understand the generic general ledger process flow as it happens in automated ERP systems. The accounting cycle explains the flow of converting raw accounting data to financial information whereas general ledger process flow explains how journals flow in the system.

  • Complexities in GL System

    Complexities in GL System

    Although technically a general ledger appears to be fairly simple compared to other processes, in large organizations, the general ledger has to provide many functionalities and it becomes considerably large and complex. Modern business organizations are complex, run multiple products and service lines, leveraging a large number of registered legal entities, and have varied reporting needs. 

  • GL - Account Allocations

    GL - Account Allocations

    An allocation is a process of shifting overhead costs to cost objects, using a rational basis of allotment. Understand what is the meaning of allocation in the accounting context and how defining mass allocations simplifies the process of allocating overheads to various accounting segments. Explore types of allocations and see some practical examples of mass allocations in real business situations.

Explore Our Free Training Articles or
Sign Up to Start With Our eLearning Courses

Subscribe to Our Newsletter


© 2023 TechnoFunc, All Rights Reserved