My expenses are overstated by the amount of a voided check
When your expenses are overstated by the amount of a voided check, the following is likely:
- You are on an accrual basis of accounting
- The bill that correlates with the voided check was written in a month prior to the check and the check void date. In Accrual basis accounting, the expense date is equivalent to the invoice date.
- The same expense account which is overstated in one month is likely understated in the next month (or the month in which the void is recorded).
Consider the following sequence of events which likely caused the issue:
Bill Created: If a bill is entered in January, the expense is debited in January when the expense was incurred.
Check Writtena: A check is then written when the bill is due. Often, this is in the next month. In this example, February.
Check Voidedb: If the check is later voided, the general ledger is updated with a transaction which reverses the expense. The void must be dated on the check date or later (in this case February). You cannot void a check before it is written.
Therefore, the transaction that recorded the expense in January is still showing on the books, since it's not reversed until Februaryb. This makes it look like the January expenses are inflated.
Bill Copied: In addition, often a copy of the bill is created when a check is voided, so the expense looks like it is doubled (the original + the copy).
You must create two journal entries to fix this:
- The first journal entry reverses the original bill.
- The second journal entry, re-adds the original bill but moves the date to the February date where the void is recorded.
How is the general ledger ultimately affected?
- The expense has been washed out in January by the reversing journal entry1 (see black arrows)
- When all three February entries are considered together the result is
A/P Debiteda → A/P Creditedc
Bank Account Crediteda → Bank Account Debitedb
Expense Creditedb → Expense Debitedc