Reversing Journals

Essentially there are two types of reversing journal – Accruals and deferred income .
Prepayments and accrued Income.
For some examples – let’s say the year end is 31st March 2018

Accruals
These are adjustments for expenses you know you are liable for at the year end (or month end) that you haven’t yet received an invoice for.
Sometimes it’s the whole invoice – net value £475.00- where goods have been delivered on 26th March 2018 but the invoice doesn’t arrive until 24th April 2018. The goods have been counted at year end and the stock adjusted for the missing invoice – the accounting entry is –
Dr. Stock £475.00 Cr. Accruals £475.00

Sometimes it’s part of an invoice – You receive an electric bill on 25th May 2018 for the period 20th February 2018 to 18th May 2018 – for £824.95 . Part of the bill relates to the financial year to 31st March 2018 and part relates to the financial year to 31st March 2019. An accrual is then calculated on the number of days in each year – 2018 = 39 and 2019 = 48 = £369.81 for 2018 and £455.14 for 2019. A more accurate way of calculating the liability at the year end is to take a meter reading and calculate using the units used and the tariff charges. This isn’t always possible and a fair view needs to be taken – the example is more to illustrate the principle – the accounting entry is –
Dr. Electricity £369.81 Cr. Accruals £369.81

Deferred Income
An example of this is deposits taken before work is carried out. This may have been invoiced but is not a sale yet and theoretically it may have to be returned if the work isn’t completed. So, at the year end is money in the bank that still belongs to your customer and is therefore a liability.

Prepayments
These are adjustments for expenses that have been paid for in advance but relate to two (or more) financial years. A good example is insurance. Car insurance was invoiced in the year for £935.25 covering the period 1st August 2017 to 31st July 2018. The split is 2018 – 243 days and 2019 – 122 days and the prepayment at the year end is 122/365 x £935.25 being the amount paid in the financial year 2018 relating to the financial year 2019. Prepayments are always known values at the year end whereas accruals may well be estimated. The accounting entry is –
Dr. Prepayments £312.60 Cr. Insurance £312.60

Accrued Income
This may be invoices that couldn’t be raised at the year end because the costs incurred relating to the invoices have not been received.

All accrual and prepayment journals need to be reversed in the new year in order to get the correct costs in the year. In the second example the invoice comes in for £824.95 in 2019 and is charged to electricity but this needs to be reduced by £369.81 because that related to 2018. this is achieved by reversing the journal –
Dr. Accruals £369.81 Cr. Electricity £369.81. This principle applies to all accruals and prepayments and in Prelude is carried out automatically. The principle applies to month end in the same way as year end but, obviously, smaller numbers. Most larger companies make accruals and prepayments monthly but most small businesses usually only once a year and it’s usually the accountant that does it.

The reversing journal format is the same as a standard journal so is not illustrated – see Standard Journals, except it asks for a date for the reversing entry – by default the next day.