In the last few articles under this category, different types of errors have been explained. Mistakes have their kinds. Therefore, not all errors are principle or commission with respect to a person’s name. Other errors might occur from wrong figures. This article takes a look at when it is a complete reversal of double entry.
Meaning of Complete Reversal of Entry
This occurs when an account which is supposed to be debited is credited and an account that should be credited is debited.
The mistake is quite simple especially if you’re familiar with double entry accounting. The laid down principles of this foundation of accounting states the class of accounts to debit and that to credit. Assets and Expenses are debited and we credit Liabilities and Capital.
This is the normal accounting principle. However, whenever assets and expenses are receiving something of value, it increases the amount in these accounts. And their accounts are debited. The same logic applies to liabilities and capital. However, if assets and expenses are giving out something of value which rarely happened with expenses, then a credit entry is passed on them. This also applies with the latter.
However if these laid rules are not followed, then, we say there is a complete reversal of entry. For example, an asset is receiving something of value instead of a debit, a credit entry was entered. Then, it is a reversal of entry. Also, if a liability account is expected to be credited but ended up as a debit, this is also a reversal.
How to know a Complete Reversal of Entry
This mistake is quite easier to notice than other types. Here, what you need to know is that the entry has been wrongly debited or credited. For example, a purchase of goods on credit from Mr. Tony for 867,000 Naira. The normal entry is to debit Purchase a/c and credit Mr. Tony a/c. But, the employee responsible for recording this transaction in the books of account may unknowingly enter a debit of Mr. Tony a/c and a credit to Purchases a/c. This is a complete reversal of entry.
Note that in this error, the entry was done in both accounts of a transaction. Therefore, it doesn’t affect the trial balance.
How to Correct this Error
Correcting an error of complete reversal is not as simple as finding the error. Here you will need to multiply the amount by two. Then post a reversing entry. Like in the above example, the amount will be multiplied by two. That is 867,000 × 2. This gives 1,734,000 Naira. Then, the correct entry will be passed. Which is:
Dr: Purchases account and
CR: Mr. Tony with 1,734,000.
The aim of multiplying the amount by two is to cancel the error posting, that is, the first amount. Then the remaining balance shall be in the correct entry. The snapshot Excel Sheet explains it.
Another way to correct this error is by recording the entry twice. That is, Purchases account is debited twice by the amount 867,000 same with Mr. Tony account. This helps to nail-off the error and the balance shall be the 867,000 Naira in the books.
Why the Error does not Affect Trial Balance
As explained, when an error affects both sides (debit and credit sides) of the books of account, it is definitely an error that will not affect a trial balance. This complete reversal mistake affects both debit and credit postings for a transaction. As you may have already noticed from the illustration above. So, it can be said that it doesn’t affect a trial balance.
An error of complete reversal of entry means the account and amount that is supposed to be debited is credited and vice versa. To correct this error, the amount is multiplied by two or posted twice in the correct entry side. Therefore, this error does not affect trial balance in any way since it occurs in both the debit and credit sides of a transaction.