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Utilizing Auto-Reversing Journal Entries

An auto-reversing journal entry is an entry made in an accounting journal, typically at the beginning of the reporting period, which reverses out specific entries made in the accounting period immediately preceding the current one. These types of entries are used to avoid errors in reporting in situations where some accrued revenue or expenses from one accounting period should not remain on the books in the next account period.

Since these types of entries are common and it is quite easy to forget to manually reverse out certain entries at the beginning of new account period, many reputable accounting softwares have this feature built in. Typically as you enter in a journal entry there is an option to tick if you want it auto-reversed. Once ticked, the software handles the necessary reversals, and the human error is eliminated.

As an example of why an accountant may need to use an auto-reversing journal entry, assume a business accrues $50,000 of revenue from a customer in the month of April. The revenue is already earned, but the invoice is not expected to be sent to the client until the month of May. The accountant would create a reversing entry for the accrual in the beginning of May to reverse out the original $50,000 accrual. Assume that more work is completed and the total billing, which is invoiced in May is $60,000. If the billing is completed and paid in May, the result is a recognition of $50,000 in April and $10,000 in May.

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