Not to worry. It happens with the best of us. There may be situations where the wrong account is an income statement one, the balance sheet one or even both. No matter the situation, it’s remedied.

First things first, you have to undo the initial entry by taking it back (by decreasing the payable you booked and taking also back the expense you charged):

Db Payable / Liability account
Cr Expense account

And then after you’ve made sure the accounts are correct this time, make the entry once more, but a correct one this time:

Db Expense account
Cr Payable / Liability account

With this you’ve now charged the expense onto the right account and booked the payable for it just as well. Continue reading →

In a situation where you’ve once booked an expense for a certain event, purchase etc. and it later on turns out there isn’t going to be a need for it either in full amount or not at all you’ve got to reverse the expense. Note here that you’ve essentially done nothing wrong that is to say that you do not need to go back and start making adjustments. No. Why? Simply because of the fact that it was your best estimate at the time and as such there’s no reason to go and adjust for it, but merely if need be reverse the expense in the period it became apparent that the actual amount is going to be of less or none at all.

Reversing an expense is actually really easy if you think about it. Normally you’d make the following entry to book for an expense:

Db Expense account
Cr Payable / Liability account

Now in a case you want to take back some or all of the expense your new entry is as follows: Continue reading →

Making revenue and recognizing it is one thing, but against all revenue earned you most certainly incur some expenses. It’s the same with everything in the world. To earn something, you first need to give up a thing or two. So as a consequence you have just after revenue on the income statement a line labeled as ‘cost of sales’ or ‘cost of goods sold’. The naming really depends on the type of business and means used to earn revenue. Either its goods you are selling in which case the name is obviously ‘cost of goods sold’, or if its services, than you should replace the word ‘goods’ with ‘services’ and so on. But understandably not all expenses are put under ‘cost of sales’ although it may feel like appropriate. There are different types of expenses one incurs over course of business, but not all are ‘cost of sales’ obviously.
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When you have figured out the period and the fact that this expense has to be recognized, a final question arises and this is a tricky one. It does not have to be difficult, but depending on the situation may require consultation and extra amount of resources in the form of time and money to come up with a figure to put into the accounts.
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What often needs to be assessed is whether certain possible outflows need to be recognized as expense. We have already covered the period in which a certain expense is recognized, but what comes into the equation, is the possibility of this not being an expense later on. We know the period, but since we are not sure of this expense really happening, does it have to be recognized?
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An expense is recognized on an income statement. That’s a fact, right. Well, what almost always raises questions, is the proper period the expense needs to be disclosed in. It’s not always this easy, you know … What I am trying to do now, is bring some insight to this situation. You have an expense and you’re not sure whether it needs to be in current, next or even prior period.
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