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:
- The accounts have been set up in the chart of accounts.
- 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.
- The date of the reversing journal has already been specified and the accounting period for that date is available for creating and posting transactions.
Process Flow Steps
- Enter a journal that reverses in the next month.
- Select the appropriate reversal option.
- 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.
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