This is a very useful in accrual accounting i.e. journals at the end of the period recording accruals and prepayments for the period would automatically reverse on the next day.
For example
30/6/18
Dr Light & Power $500.00
Cr Accruals -500.00
Automatic reversal
1/7/18
DR Accrual
Will add this to the Ideas Category
Excellent idea.
This would make Manager more professional and sophisticated.
All my life I worked with software that had this functionality built in.
Thanks @Brucanna for adding this to the ideas category.
I vote for this. Very useful. A sort of “clone and reverse” would be great
I think that independently from accrual accounting a “flip” function would be very useful also to quick correct wrong imputations in journal entries.
Apologies, but having been reminded by @dalacor of my previous comments I am going to delist this topic from the Ideas category. First my previous comments and then illustrated reasons.
The reversing journal is the traditional approach, but the more modern approach is to leave the accrual expense in the BS accrual account and then allocate the invoice directly to that BS accrual account. When reversing a Journal your income / expense account show a false value (balance) until the next related transaction is posted. Also, for year end accounts, by not reversing you are keeping previous year P&L chatter out of your current year P&L.
Using @Beery example:
On the last day of the month they take up an accrual for Light & Power at 500.00
On the first day of the next month they reverse that Journal, this now implies that this expense account is now in profit for the month until the invoice arrives, if that is not until the 15th of the month then the P&L statement is being distorted until then. If you have 8 different income / expenses which you accrue at month end, then that is 8 different distortions to the P&L.
If the Light & Power Invoice is only received quarterly then the situation only gets worse (messier).
End of Jan (31st) you accrue an expense of 500.00
Beginning of Feb (1st) you reverse that accrual so the account shows:
For a Feb only P&L (as at Feb 1) a 500.00 profit.
For a Jan to Feb YTD P&L (as at Feb 1) a zero balance
End of Feb (28th) you accrue an expense of 1000.00
For a Feb only P&L (1st to 28th) a 1000.00 accrual but only a 500.00 expense.
For a Jan to Feb YTD P&L (Jan 1 to Feb 28) a 1000.00 accrual and a 1000 expense
Then for March the whole process repeats. This accrual / reversal is just unnecessary duplication and it also creates really messy ledgers.
Whereas if the monthly accruals are retained in the BS then the ledgers are much cleaner.
Besides which, you can clone a previous journal which shortcuts the creation if each month end accrual is similar.
You could still keep this topic as an idea to remind Lubos what he actually wanted to introduce. He does have a module in mind that he wants to introduce so while it won’t be reversing journals per se - it will address the need to more elegantly handle BS stuff that people use Reverse Journals to do.
If not mentioned before:
Allowing to set up Transistoria to expenses (or income) you would be able to spread the current received costs to several month. I prepay now € 1.500 of Energy costs for the coming 3 months. If it allows me to set a period of 3 months than for the invoice of the 28th of May 2019 the costs are spread until the 28th of July 2019.
If you allow costs to fall in a certain period, like 5/2019 until 28/07/2019 of maybe with hindsight 06/03/2019 until 06/09/2019, you could produce correct statements for when you know it.
I would suggest below the P&L an “not effected accrual” effect as well.
My current result is € 25.000. However, I received for coming periods the above mentioned € 1.500 of costs. My real result if I stop working today would then be € 23.500.
Greeting All
This question of reversing journal entries has stimulated a passionate response from a number of contributor, and I impressed with all the views being put forward.
I would like this opportunity to express my view on the matter.
I have never been an advocate of accounts looking pretty, I’ve never considered them being a beauty show, I’ve also taken the KISS approach and if one is responsible for the accounts of a large organisation with accrual calculations ranging between 25 to 35 accounts on a monthly basis, one soon works out the best way to record this volume with the minimum effort, otherwise you would get bogged down.
The concept of reversing journal entries made this task quite simple to administer. That is not to say that other methods could be applied and a similar solution could be arrived at, this is my personal view.
I would like to take this opportunity to respond to Brucanna regarding the comment that if the monthly accruals are retained in the BS then the ledgers are much cleaner?? I should imagine that the accrual in the BS would have to be reversed at some stage, otherwise it would continue in perpetuity.
The two obvious ways to reverse the accruals would be:
(1) To reverse the accruals, so the account should show a Nil balance [BS] and the utility invoice be paid and allocated to light and power. [P&L]
(2) To allocate the utility invoice to accruals and this would reverse the amount shown in the BS.
this could create problems if the accrual has been overstated or understated.
If the accrual has been understated, accrual is $1500 and the utility bill shows $1625.
Option (1) may be once again applied and the Utility invoice would be allocated to Light & Power, if option (2) is applied the the utility would have to be allocated as Follows, Debit Light & Power $125 [P&L] and Debit Accruals $1500 {BS}, this would have the effect reversing the accrued expense and allocating the correct P&L amount.
Should the accrual be overstated say accrual recorded as $1625 and the actual utility invoice is $1500
then in option (2) the utility invoice would be allocated as Debit Accrual $1625 and Credit ($125) for the nett payment of $1500.
The reconciliation of BS items is an ongoing monthly process and the reconciliation of accrued expenses was as simple as attaching the accrual monthly worksheet to the accrual as a verification of the amount stated in the BS an very simple process which was accepted by external auditors without question.
The reconciliation of accrued expenses in this situation where the transaction remains in the BS then each month’s entry would have to be recorded so to agree with the general ledger, seems a lot of extra wasted effort.
I once again say that I do appreciate that there are a number of ways to achieve a similar result, I’m only expressing my experience having worked in a large organistaion, and found that reversing journal entries helped me in doing my job, that is not to say that others may prefer a different method of dealing with this question, and I respect there views and wish them all the very best.
Having an automatic accrual function by setting the starting and ending date (for linear accruals) would save a lot of time to most of the users. However linear is not the only way… But the most frequent for sure.
