Rounding - What is rounding?
Rounding is the process of replacing a numerical value with a shorter, simpler, or more suitable representation of approximately the same value.
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In accounting, rounding is used to simplify financial reports or to ensure prices fit with intervals of currency.
Financial values are usually rounded to a decimal number with fewer decimal places or to a specific interval (such as the nearest 10, 100, or 1 million). If the next interval or decimal place is 1-4, the number should be rounded down, if it is is 5-9, it should be rounded up.
For example, £8,402,123.68 rounded to one decimal place would be £8,402,123.7. Rounded to the nearest million, it would be £8,000,000.
Rounding prices to decimal places
In the UK, the lowest interval of legal tender is a penny – or £0.01. Financial values should therefore be limited to two decimal places to fit with these intervals. However, businesses may sometimes be faced with an amount which exceeds two decimal places. In these cases, it is usually sufficient for most businesses to round to the nearest penny.
For example, a business has a special offer for one third off any new order. A customer places an order for £100, which becomes £66.66 recurring once the discount is applied. Because it is sufficient to round to two decimal places, and because 6 rounds up, the business would raise an invoice for £66.67.
Cash rounding is when cash payments are rounded to intervals of currency because a price does not fit into denominations of legal tender. This can occur if certain coins are taken out of circulation or if particular denominations of cash become impractical.
For example, the Danish krone is the official currency of Denmark - one krone is divided into 100 øre, but the smallest denomination of coin is 50 øre. Prices can still be set at one øre intervals but, when payments are made in cash, prices are rounded to the nearest 50 øre. Purchases made via debit or credit card are usually charged at the exact amount.
Rounding in financial reports
All businesses should keep financial records and produce financial statements for statutory accounts and tax returns. For example, at the end of each financial year, private limited companies must submit a profit and loss account, a balance sheet, and potentially a directors' report and an auditor’s report (depending on the size of the business).
Because the figures on these financial statements can get quite high, figures are often rounded to a more suitable interval in order to emphasise the important digits and make the statements easier to read.
For example, a turnover of £1,429,102.33 rounded to the nearest thousand would be written as £1,429. The financial statement must state that amounts have been rounded to the nearest 1000 so that the reader can accurately understand the figured reported.