Prepare a report on the discussion of the advantage and disadvantages of reversing entries.
Detail: A presentation structured to include an Introduction (to the question, to the group members and what each is presenting), the Body (Main detailed answer usually shared/split between two or three members of the group) and the Summary and Conclusion (a summary of the presentation and conclusions/recommendations reached).
The primary aim of conducting the reversing entries is to eliminate certain adjusting entries accruing from the former accounting regime. Additionally, reversing entries is carried out in order to avoid the double counting of revenues and expenses and to allow the efficient processing of documents (Hoggett, Edward, Medlin, & Tilling 2012).They are essentially the most widely accrual-type adjusting entries. This practice is usually carried out on the commencing business day. Reversing entries is a system in which accounts use to cancel out the adjusting entries that had been made to accrue and expenses that were incurred at the end of the previous accounting period. Hence, any subsequent transactions are correctly recorded after eliminating certain compound records.
Adjusting the entries depend upon an enterprises’s need. It is not mandatory that every business should adopt the practice. The need to reduce errors and save time prompts an organization to undertake the practice. The entries that are usually reversed include accrued revenues or expenses for the previous period. Typical accounts to change cover salaries and wages payable as well as interest payable
How is reversing of entries done?
When considering to modify entries, a firm will often be after the goal of ensuring the expenses and the revenues are recorded in the appropriate period. A good example would be when the company takes out a loan. In case the loan issued was to be repaid over a term of fifteen months with the interest payable on the fourteenth of the next month, entries should be recorded in such a manner that each month reflects only the interest expenses associated with that month. In order to record the costs correct in the general ledger, adjusting entries should be done at the end of the respective month at half the interest expense (Hoggett, Edward, Medlin, & Tilling (2012) postulated that the journal entries are usually posted posted in such a way that the journal debits the interest expense and credits the interest payable. At the beginning of the preceding month, the cost should be reversed through the reversing entry. The reversal can be done by debiting the interest payable while crediting the interest expense.
However, not all entries are reversed. In order to determine which adjusting entries to change, the following rule is followed: ‘all adjusting entries that increase the asset and liabilities from a zero balance should be reversed while the first year of operations should not be adjusted. Inventory and contra entries of assets such as accumulated depreciation ought to have existing balances. These entries should not be reversed.
Merits of Reversing entries
Reversing of entries avoids duplication of revenue and expense entries which consequently improves the accuracy of records. The reversing entries cancel out the expense or revenue entry thereby correcting the record. Ideally, reversal of entries is done sequentially during the closing period. For example, journal entries for the month of January are usually reversed on February in order to avoid duplication in February. Reversing the entry of February in January is not correct.
It does not require an accounting expert to maintain the reversal entries. Reversing the entries is a simple process that can be performed perpetually. Essentially, when reversing entries, the amount once debited is credited while the amount that was credited becomes debited. Conducting the calculations does not require expertise beyond that routine practice. Special attention should be placed on entry of values in the journal account (Hoggett, Edward, Medlin, & Tilling 2012). The reversed figures should be similar to the actual amounts indicated in the accounts. Reversal of entries may hence go on for a long period of time without causing unnecessary complications. Though the operation of activities is different, reversing their entries is the same concept.
The good thing about reversing entries, is the fact that it can be done in advance. This would make the entire process efficient and enjoyable to use. In the modern world, the availability of computerized systems speeds up this process. The computer systems are useful as they only require you to mark the activities which are reversible, and the system automatically creates a reversal entry in the following period. Nevertheless, there also exists sophisticated systems that give the accountants timing options. In a case where entries record negative figures even before the actual transaction is carried out thereby giving weird results is corrected by having a system in place that automatically tracks transactions carried out.
More often than not, accountants make errors while entering the journal entries. Instead of trying to fix the errors manually it would be ideal to reverse the entry and insert the correct figure instead. Creation of reversal entries is simple and efficient thereby creating a flow within the transactions. When reversing the entries, the reason behind the accountant making the reversal is usually written nicely in the details section. This will greatly help when conducting researches and when analyzing the accounts (Hoggett, Edward, Medlin, & Tilling 2012). During auditing, the accountant as well as the auditors review the accounts seeking to know certain facts regarding the recording of entries. Through efficient, reversing of entries, however, faces some setbacks. These demerits include:
Overstatement of accounts and understatement of accounts
Making the wrong entry into the system will imply that some accounts will have more figures in the accounts (overstatement) while other would indicate fewer data in relations to the actual values (understatement). Failure to show record in the second entry when reversing accounts causes the occurrence of fatal errors to the system. The possibility of making a mistake especially when the organization is using a manual system, is high, and when made, the accounts become overstated/understated. This brings about complications in the system due to erroneous figures.
It makes the work of accountants hefty.
Maintaining the records of the entries is quite a massive job for accountants. The reversal entry system also requires the tracking of entries to ensure that they are entirely correct. Without a tracking device, it would be confusing to know what entries to reverse and which ones to maintain. Manual reversal of entries by accountants add to work to them. Every entry that requires reversal should have two entries. These might be hectic to the accountant, and therefore it may require the accountant to develop a tracking system. This is so because and entry with a given figure needs to be checked so that the reversing entry should reduce the transaction to zero. To maintain this system especially the manual system, the accountant would have to do a lot of work.
Addition of extra journal entries.
Not only does the reversal system add entries to the journal but also increases the probability of making errors. However, this is only a demerit in case the firm is using a manual system. With an automatic system, the errors are eliminated from the automated system keep good track of transactions especially the reversal entries.
It is costly
In order to eliminate errors, a firm might decide to install and put in place a system that maintains the reversal entries. This would involve costs such as administration costs, installations costs, and consultation costs as well as other overheads in order to make the system working. This costs which accrue do the firm reduce the amount of profits it receives since it would finance the project using its own cash flows. However, in the long-run, the system generates revenues that recover the original costs. Installation of the system also reduces complexity and hence sufficient to install though some money has to be parted with.
Essentially, whether reversing entries system is used or not, the results are the same. Adjusting entries presupposes that the firm has adopted accrual accounting. In terms of the matching principal, accrual principle is more correct. Nevertheless, it does not specifically show the cash situation of the company. According to Hoggett, Edward, Medlin, & Tilling (2012), to determine the exact position of the cash cycle, a separate cash flow report should be prepared. For larger enterprises such as public corporations, they use accrual accounting while the small businesses such as the self-employed retailers may also find accrual cost accounting useful according to their needs. To them, reversing entries is optional.
Though reversing entries is not a must for enterprises, maintaining the adjusted entries stand to benefit the company more than it can harm it. Reversing entries should be adopted by modern companies for a smarter, accurate and efficient presentation of transactions of the enterprise. Hence, it should be a practice that should be adopted by firms. With the advent of automatic systems that help in reversing entries, business process have been automated and made easier in addition to becoming efficient for the overall attainment of millennium goals.
Hoggett, J., Edward, L. Medlin, J., & Tilling, M., (2012). ACC101 Introduction to Financial Accounting
. 8th ed. Australia