Auto-Reversing a Journal entry.

Auto-Reversing a Journal entry.

Auto-Reversing a Journal entry

Understanding how reversing entries work:

  • At the end of an accounting period, adjusting entries may be added. Adjusting entries are part of accrual accounting, whereby revenue is recorded when it is earned and expenses when they are incurred. (i.e. recorded in the same accounting period), regardless of when the actual cash is received or paid by an enterprise. 
  • Note: Adjusting entries only exist in accrual accounting and do not exist in cash accounting.
  1. Examples of adjusting entries related to revenues (i.e. accrued assets) include - accrual for services provided but not invoiced, interest income accrual, and accrual for goods shipped but not invoiced.
  2. Examples of adjusting entries related to expenses (i.e. accrued liabilities) include - rent, payroll, shipping and interest expense accruals.
  3. An auto-reversing journal entry is a journal entry made at the beginning of an accounting period to reverse or cancel out adjusting journal entries made in the previous accounting period.
  4. Reversing entries are used in order to avoid the double counting of revenues or expenses. 
  5. Reversing journal entries are made because previous year accruals and prepayments will be paid off or used during the new accounting period and no longer need to be recorded as liabilities and assets.
  6. If adjusting entries are posted at the end of an accounting period, they may distort the financial statements of the following accounting period (because a lot of the accrued transactions self correct in the next accounting period.) Reversing journal entries effectively reverse the adjusting entries from the previous period and eliminate their impact on the current accounting period, but they don't change anything in the period when adjusting entries are posted.
  7. Cashbook allows you to set these adjusting journal entries so they automatically reverse at the beginning of the next financial period: 
  8. It is easy to forget to manually reverse an entry in the following accounting period, so Cashbook allows you to set these adjusting journal entries so they automatically reverse at the beginning of the next financial period:

To setup an adjusting journal entry, so it automatically reverses in the next accounting period:

For example: A company pays rent of $3000 on the 10th of each month. On the 10th of July the company pays the whole monthly rent amount and records it as an expense. The company wants to pro-rata the rent, so rent portion for June 2016 (10th of June to 30 June or 2/3 of the monthly rent) is recorded in the current financial period as an adjusting entry. To eliminate the impact of double-recording, the company can post a reversing entry on the 1st of July, which will eliminate the impact of the adjusting entry on the July financial statements.

 

Step 1. Adjusting Journal Entry recorded at the end of June

Rent Expense = $3000 x 2/3 = $2000

  • Enter journal information.
    • Debit - Rent Expense
    • Credit - Accrued Rent Expense

Note: MAKE SURE THE  Auto Reverse  BOX IS TICKED. This will ensure that this adjusting entry is automatically reverse in the next period.

  • Click OK to save.

 

Step 2. Auto-Reverse Journal Entry:

  • In the next financial period the Auto Reverse Journal will appear as follows:
    • Debit - Accrued Rent Expense
    • Credit - Rent Expense

 

  • The company pays the monthly Rent Expense of $3000 on the 10 July.
  • The effect of these journal entries in conjunction with the payment are as follows:



Article ID 1697