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 14161

You May Also Like

  • Functional Organizational Structures

    Functional Organizational Structures

    A functional organizational structure is a structure that consists of activities such as coordination, supervision and task allocation. The organizational structure determines how the organization performs or operates. The term organizational structure refers to how the people in an organization are grouped and to whom they report.

  • GL - Using Adjustment Period

    GL - Using Adjustment Period

    In most of the automated financial systems, you can define more than 12 accounting periods in a financial year.  This article will explain the concept of the adjustment period and the benefits of having adjustment periods. Adjustment periods have their inherent challenges for the users of financial statements and there is a workaround for those who don’t want to use adjustment periods.

  • Defining Internal Structures

    Defining Internal Structures

    Internally, an organization can be structured in many different ways, depending on their objectives. The internal structure of an organization will determine the modes in which it operates and performs. Organizational structure allows the expressed allocation of responsibilities for different functions and processes to different entities such as the branch, department, workgroup and individual.

  • The Subsidiary Ledgers

    The Subsidiary Ledgers

    For any company that has a large number of transactions, putting all the details in the general ledger is not feasible. Hence it needs to be supported by one or more subsidiary ledgers that provide details for accounts in the general ledger. Understand the concept of the subsidiary ledgers and control accounts. 

  • Understanding Joint Ventures

    Understanding Joint Ventures

    A joint venture (JV) is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets.  A joint venture takes place when two or more parties come together to take on one project.

  • 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. 

  • Concept of Subsidiaries

    Concept of Subsidiaries

    A subsidiary is a company that is completely or partly owned by another corporation that owns more than half of the subsidiary's stock, and which normally acts as a holding corporation which at least partly or wholly controls the activities and policies of the daughter corporation.

  • GL -  Periods and Calendars

    GL - Periods and Calendars

    In some of the ERP tools, there are more than 12 accounting periods in a financial year. This article discusses the concept of accounting calendar and accounting periods. Learn why different companies have different accounting periods. Understand some of the commonly used periods across different organizations and the definition & use of an adjustment period.

  • Business Metrics for Management Reporting

    Business Metrics for Management Reporting

    Business metric is a quantifiable measure of an organization's behavior, activities, and performance used to access the status of the targeted business process. Traditionally many metrics were finance based, inwardly focusing on the performance of the organization.  Businesses can use various metrics available to monitor, evaluate, and improve their performance across any of the focus areas like sales, sourcing, IT or operations.

  • The Accounting Equation

    The Accounting Equation

    In this article we will help you understand the double-entry accounting system and state the accounting equation and define each element of the equation. Then we will describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation.

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

Subscribe to Our Newsletter


© 2023 TechnoFunc, All Rights Reserved