Only good accountants can save the world – through peace, goodwill,reconciliations and….reversing entries.
Reversing entries are financial journal entries made at the beginning of a financial period to reverse or cancel out adjusting entries made at the end of the previous financial period.
The Important thing is, it simplifies your bookkeeping for the next financial period.
Now we all know that behind every successful accountant is a substantial amount of coffee and the ability to reverse entries, and reversing entries help prevent accountants from double recording of revenue and expenses. Most businesses still function on accrual accounting, which means they incur expenses for which there is no expenditure documentation yet. E.g. Goods received and consumed for which no supplier invoice has been received.
The use of reversing entries is optional, but it offers certain advantages, making them very popular in the accounting world with regards to accrual accounting:
- Reversing an entry from a previous financial period prevents any duplications of revenue or expenses, thus increasing the accuracy on your financial statements come year end.
- There is no mystery. The process of reversing entries is so simple you do not have to be a mathematical genius or have extensive accounting background and no special training is required. It is simply a process of debiting the original amount that was credited and the other way around. Nothing else changes. Take a hotel’s housekeeping department, if the original entry was a debit to Housekeeping Supplies and a credit to Accrued Expenses, the reversing entry credits Housekeeping Supplies and debits Accrued Expenses by the exact same amount in the next period.
- It keeps bookkeeping unambiguous by keeping record of the original entry and the reversal, making it easier for auditors and management to keep track of all transactions.
- Accountants are only human and 10 out of 9 can’t count, but, when using a computerized accounting system you can set up automatic reversals so you do not have to do it manually.
- Having a automatic reversal setup is also advantageous, especially when most businesses still function on accrual accounting methods by reducing the chance of input errors.