Sometimes, mistakes can happen, such as recording a repair expense as an asset or when the nature of an account changes over time. A reclassification entry corrects this and moves the amount to the appropriate expense account. It ensures that the financial records accurately reflect the transaction.
In this article we will cover the following topics:
- Definition of reclassification journal entries.
- Record a reclassification journal entry.
- Examples.
Let’s get started with the definition.
Understanding Reclassification Journal Entries
Reclassification journal entries are adjustments made in accounting to move amounts from one general ledger account to another. It ensures that financial transactions are accurately categorized and financial statements reflect the true financial position of a company.
Here are some reasons of why we have to use reclassification journal entry.
- Errors can occur when you record transactions, such as mistakenly debiting a repair expense to an asset account like Equipment. A reclassification entry corrects this and moves the amount to the appropriate expense account.
- A certain assets or liabilities may change in status. For example, a long-term liability approaching its due date may need to be reclassified as a current liability to accurately reflect its short-term nature on the balance sheet.
- Companies might need to change how they record transactions to follow accounting rules.
Let’s move on to the following section to see how it works.
Record a Reclassification Journal Entry
Here’s how to record record a reclassification journal entry:
- Determine which accounts need adjustment.
- Specify the exact amount to be reclassified.
- Prepare the journal entry.
- If the account you are moving the amount to normally has a debit balance (e.g., expenses), debit this account.
- If the account you’re moving the amount from normally has a credit balance (e.g., revenues), credit this account.
Let’s see more examples.
Examples of Reclassification Journal Entries
Suppose a $500 payment for office supplies was mistakenly recorded under building maintenance expenses. To correct this:
- Debit: office supplies expense $500 (increases this expense).
- Credit: build maintenance expense $500 (decreases this expense).
Here is the Journal Entry:
| Account | Debit ($) | Credit ($) |
|---|---|---|
| Office Supplies Expense | 500 | |
| Building Maintenance Expense | 500 |
Wrapping Up
In this article you learned how to record the reclassification journal entry and its definition. Here is a quick recap:
- Reclassification journal entries are adjustments made in accounting to move amounts from one account to another.
- It is used for the following reasons:
- Reclassification journal entry corrects Errors.
- It reflects Changes in Account Status.
- It makes sure Compliance with Accounting Standards.
FAQ’s
What is a reclassification journal entry?
A reclassification journal entry is an accounting adjustment that moves amounts from one general ledger account to another. This ensures that financial transactions are accurately categorized, reflecting the company’s true financial position.
Why are reclassification entries necessary?
Reclassification entries are used to correct errors, update account statuses, and ensure compliance with accounting standards. They help maintain accurate financial records and provide clear financial statements.
How do I record a reclassification journal entry?
To record a reclassification journal entry:
- Identify the accounts involved: Determine which accounts need adjustment.
- Specify the amount: Decide the exact amount to be reclassified.
- Prepare the journal entry:
- Debit the account to increase: If the account you’re moving the amount to normally has a debit balance (e.g., expenses), debit this account.
- Credit the account to decrease: If the account you’re moving the amount from normally has a credit balance (e.g., revenues), credit this account.
Do reclassification entries affect financial statements?
Reclassification entries adjust the presentation of financial information but do not change the overall financial position or net income of a company. They ensure that financial statements accurately reflect the nature of transactions.
Thank you for reading. If you would like to see more accounting tutorials, please click here.
