To reverse or not to reverse?

When we were at the design stage of EasyAccrue there were a number of fundamental questions that needed to be answered at an early stage, as they would shape the structure of the software.

One of these was the type of journal process we would use. Should we

1.??????????? Only post monthly movements for changing individual accruals and prepayment

OR

2.??????????? Use the fully reversal method when posting accruals and prepayments

?During the course of my career, I’ve come across accountants who swear by the full reversal method when it comes to adjusting for accruals and prepayments and those you are equally adamant that the ‘monthly movement journal’ is the most efficient method.

To give a simple example if we have an expected audit charge of 12,000 in the year, we need to accrue 1,000 per month. If we decided to use method 1 above we would post the monthly movement of 1,000 every month. If we decided to use method 2 we would post 1,000 in month 1. In month 2 we reverse the 1,000 and post 2,000. In month 3 we reverse 2,000 and post 3,000 and so on.

Here’s how our thought process went…

Our first instinct was to go with only posting monthly movements.

1.??? Any static accruals/prepayments don’t need to be adjusted

2.??? It involves fewer journals

3.??? It ‘felt’ simpler

Using the full reversal method

1.??? All accruals and prepayments are fully reversed

2.??? There are more journals

3.??? It ‘felt’ more complicated

However, on reflection we decided to go with the full reversal method.

1.??? Accrual and prepayments go back to zero at the end of every month so these accounts are self-balancing.

2.??? Although there are more journals it’s easier to see the audit trail with full amounts going through and month end and full reversals going through on the first day of the following month.

3.??? Monthly movements are important and are clearly visible on the system but the total accrued/prepaid amount is the amount you’ll need to stand over at audit time.

4. When carrying out expense analysis, having fully reversed accrual and prepayment transactions makes it much easier to identify and contra those transactions.

Sometimes our first instinct and the solution that ‘feels’ simpler is not always the right choice.

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