The purpose of reversing journals

[Numbers]

Hi,

I might sound completey thick here - but at work we often reverse accruals journals every month. I don't understand why we do this. Can someone shed some light on this?

I know I should probably ask at work, but I find them difficult to comprehend at times.

All help is very much appreciated.

Regards,
Numbers.

[hariharm]

Hi Numbers,

The reason why in practice may companies prefer reversing journals for accruals is that it is easier to have the transaction processing staff to book the same journal for a given type of expense. For example all commission invoices should be booked to Commission Expense. By reversing any accruals made, the staff can just book the invoice to the expense to the same account, regardless of the period the expense was incurred. They don't need to worry about how to apportion the invoice amount between accruaals and expenses. In real life these steps could add up a lot of time to the process; so reversing journals simplify the process. The arithmetic effect is the same as non-reversing journals, and then splitting between accruals and expenses.

Hope this helps

[Jerushah]

Interestingly enough, I have always wondered the same thing, so thanks for shedding light on the matter Hariharm!

(And Numbers, don't feel bad about not wanting to ask your colleagues at work, I often feel like my senior has no time to answer my questions. In fact, everytime I ask her something, she gets annoyed!)

[SalinaA]

Jerushah that is awful! In any job the supervisors/managers should always take time out to explain things! How else are we meant to get it nall right??

[hariharm]

Guys,

Regardless of how intimidated you might feel, don't hesitate to get your doubts resolved at work - if you can't ask your supervisor b/c they're too busy or appear unapproachable, find someone who can mentor you at work. While forums like GTG are always available for general or theoretical stuff (such as reversing journals!), some things may be sensitive and you may find it uncomfortable to discuss them outside the organization. So you need to find ways to get your doubts cleared within the organization as well.

I talked of the advantage of reversing journals earlier. On the other hand, the advantage of non-reversing journals is that the process forces you to constantly compare actual payments with accruals, so you can "sense" if expenses are being properly accrued, or if significant expenses are being missed out. In other words it is possible to monitor the correctness of accruals and determine if improvements need to made. With reversing journals, there is the risk that we may become complacent and continue to under-accrue or over-accrue without even realizing this. So if an entity decides to go with reversing journals, it should also put in place a separate process of evualting the correctness of accruals by looking at subsequrnt payments.

[Numbers]

Thanks for all the replies.

I find it very hard to ask questions mainly because I don't seem to understand what people are saying. Perhaps the accounting jargon becomes too much, or maybe I become nervous. I have also had bad experience when asking for help - people have made me feel really stupid infront of other colleagues. In fact I wonder if I should even continue this career path; it has been a question in my mind for a very long time.

[hariharm]

Hi Numbers,

Here's a tip - there are very few career paths where you don't feel overwhelmed by things, especially when you're starting out! Sometimes you get lucky and find a person who is willing to coach you and start you on a comfortable path (no matter what field you choose). Most people find a mix of good and bad interactions with people as they progress through life, and that should be considered part of one's education.

My point is, don't give up on accounting simply because you think you've had a few bad personal experiences. This is not to say that everybody naturally loves accounting. Some people rightly or wrongly conclude that they have better things to do - more power to them! But there are no guarantees that in other career paths you will not come across similar experiences. At least in accounting, the field is broad enough that you can move across companies and industries, if you don't like the environment.

Just thought you should think through this carefully before making a quick decision.

Good luck!

[Jerushah]

Numbers - Hariharm has given you some great advice. Before I studied accountancy, I worked in marketing for a year and felt just as overwhelmed as I do now. No matter what industry you're in, it takes a while before you feel like you're completely on top of your work - and just when you feel in control, you'll find that you're asked to take on more responsibility. You can't grow unless you don't challenge yourself.

I reckon we should do as Hariharm says and find a colleague at work who is willing to mentor us and asnwer our questions, that's the only way to move forward.

Good luck and hang in there :)

[Numbers]

Hey thanks guys, I really appreciate your support.

I often question my abilities because I have never been good at mathematics and wanted to be so I put myself in this feild to prove a point to myself - that anything is acheivable if a person applies themself. But on my way people have made a lot of jabs at me saying "Hmmm you don't know your time tables - not very good for an accountant is it?". And I wasn't your typically smart student at school. I used to have a special teacher assitant at high school and primary shcool. I used to get not applicable grades! But I started to improve dramatically after some positive encouragement from a teacher and started to get As and Bs. I studied Accounting and Finance at uni and admittedly did struggle with it but passed. So, I wonder, if even after studying accounting at uni I am still not understanding it - should I continue to do it? Are all those people who put me down right? That I should not be doing this because I am not numerically smart?

[hariharm]

Hi Numbers - if you want some inspiration, read "The Pursuit of Happyness" by Chris Gardner..... or just watch the movie of the same name starring Will Smith, and then read the book!

Also keep in mind that because Accounting is a broad field, at any point in your working life you will most likely be performing a few specialized tasks, or be focussed on a couple of technical areas. So during that time make sure you understand every aspect of the limited set of duties that are entrusted to you.... try to pick up something more, but don't be unduly worried if this happens slowly. I can guarantee that even people that aced questions in special topics like lease accounting or pension accounting or hedge accounting, would have forgotten most of the technical points if they are not actually doing this day in and day out, as part of their job!