GL - Reversing Journal Entry

GL - Reversing Journal Entry

Reversing Journals are special journals that are automatically reversed after a specified date. A reversing entry is a journal entry to “undo” an adjusting entry. When you create a reversing journal entry it nullifies the accounting impact of the original entry. Reversing entries make it easier to record subsequent transactions by eliminating the need for certain compound entries. See an example of reversing journal entry!

What is a Reversing Journal Entry?

A reversing entry is a journal entry to “undo” an adjusting entry. When you create a reversing journal entry it nullifies the accounting impact of the original entry. Reversing entries make it easier to record subsequent transactions by eliminating the need for certain compound entries.

Reversing entry can be created in two ways. The first method is to use the same set of accounts with contra debits and credits, meaning that the accounts and amounts that were debited in the original entry will be credited with the same amount in the reversing journal “nullifying” the accounting impact. The second method is to create a journal with the same accounts but with negative amounts that will also nullify the accounting impact of the original transaction.

Automated Process Requirements:

  1. The accounts have been set up in the chart of accounts.
  2. The reversal criteria have been specified in the original adjustment or accrual journal, otherwise, the user generally needs to submit the journal manually for reversal.
  3. The date of the reversing journal has already been specified and the accounting period for that date is available for creating and posting transactions.
GL - Reversing Journal Entry

Process Flow Steps

  1. Enter a journal that reverses in the next month.
  2. Select the appropriate reversal option.
  3. At the beginning of the next period system creates a reversing entry dated the first day of the next accounting period.

Example of a reversing entry:

The business has taken premises on rent. The rent payable for each month is $200 and the invoice is raised by the landlord on the 15th of the subsequent month. The accounting department takes 5 days to process the payment and deposit the amount in the Landlord’s account. December is the close of the accounting year and the invoice for rent for the month of December will be received by the company on the 15th of January and payment will be made by the 20th of January.

Closing Books: On the 31st of December, the accounting department passes the rent accrual accounting entry, debiting the “Rent Expense” and crediting the “Rent Payable Account”. This entry records the rent for the month of Dec and creates a liability for “Rent Payable” to the landlord next month. At the beginning of the next accounting year, on day one this entry is reversed by debiting the “Rent Payable” and crediting the “Rent Account”.

Making Payment: Once the payment for Rent is made on 20th January (Again by Debiting “Rent Expense” and Crediting “Bank Account”) this reversal will ensure that the rent for last year is not impacting the current year financials as the net impact on the “Rent Expense” account will be zero. 

Related Links

Creation Date Tuesday, 30 November -0001 Hits 32001

You May Also Like

  • Introduction to Organizational Structures

    Introduction to Organizational Structures

    Organizations are systems of some interacting components. Levitt (1965) sets out a basic framework for understanding organizations. This framework emphasizes four major internal components such as: task, people, technology, and structure. The task of the organization is its mission, purpose or goal for existence. The people are the human resources of the organization.

  • GL - Accrued Expenses

    GL - Accrued Expenses

    Accrued expenses, sometimes referred to as accrued liabilities, are expenses that have been incurred but have not been recorded in the accounts. Discuss the need to record accrued liabilities and why they require an adjustment entry. Understand the treatment for these entries once the accounting period is closed and learn to differentiate when the commitments become liabilities.

  • GL - Unearned / Deferred Revenue

    GL - Unearned / Deferred Revenue

    Unearned revenue is a liability to the entity until the revenue is earned. Learn the concept of unearned revenue, also known as deferred revenue. Gain an understanding of business scenarios in which organizations need to park their receipts as unearned. Look at some real-life examples and understand the accounting treatment for unearned revenue. Finally, look at how the concept is treated in the ERPs or automated systems.

  • Driving Business Efficiency through Divisions and Departments

    Driving Business Efficiency through Divisions and Departments

    In case of a multi-divisional organizational structure, there is one parent company, or head-office. And that parent owns smaller departments, under the same brand name. Dividing the firm, into several self-contained, autonomous units, provides the optimal level of centralization, in a company.

  • Sole Proprietorship Form

    Sole Proprietorship Form

    The sole trader organization (also called proprietorship) is the oldest form of organization and the most common form of organization for small businesses even today.  In a proprietorship the enterprise is owned and controlled only by one person.  This form is one of the most popular forms because of the advantages it offers. It is the simplest and easiest to form.

     

  • 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.

  • 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 - Understanding Chart of Accounts

    GL - Understanding Chart of Accounts

    A chart of accounts (COA) is a list of the accounts used by a business entity to record and categorize financial transactions. COA has transitioned from the legacy accounts, capturing just the natural account, to modern-day multidimensional COA structures capturing all accounting dimensions pertaining to underlying data enabling a granular level of reporting. Learn more about the role of COA in modern accounting systems.

  • GL - Intercompany Accounting

    GL - Intercompany Accounting

    After reading this article the learner should be able to understand the meaning of intercompany and different types of intercompany transactions that can occur. Understand why intercompany transactions are addressed when preparing consolidated financial statements, differentiate between upstream and downstream intercompany transactions, and understand the concept of intercompany reconciliations.

  • 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