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    Reversing Entries Part 1

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    Reversing entries are made at the beginning of an accounting period to reverse adjusting entries made at the end of the previous period, making the accounting process smoother. Only certain types of adjusting entries can be reversed, including those for accrued income, accrued expenses, unearned revenue using the income method, and prepaid expenses using the expense method. Reversing these entries debits what was previously credited and credits what was previously debited. This summary provides an overview of reversing entries and the types that can be reversed.

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    Reversing Entries Part 1

    Uploaded by

    api-299265916
    3K views3 pages
    Reversing entries are made at the beginning of an accounting period to reverse adjusting entries made at the end of the previous period, making the accounting process smoother. Only certain types of adjusting entries can be reversed, including those for accrued income, accrued expenses, unearned revenue using the income method, and prepaid expenses using the expense method. Reversing these entries debits what was previously credited and credits what was previously debited. This summary provides an overview of reversing entries and the types that can be reversed.

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    Reversing entries are made at the beginning of an accounting period to reverse adjusting entries made at the end of the previous period, making the accounting process smoother. Only certain types of adjusting entries can be reversed, including those for accrued income, accrued expenses, unearned revenue using the income method, and prepaid expenses using the expense method. Reversing these entries debits what was previously credited and credits what was previously debited. This summary provides an overview of reversing entries and the types that can be reversed.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    3K views3 pages

    Reversing Entries Part 1

    Uploaded by

    api-299265916
    Reversing entries are made at the beginning of an accounting period to reverse adjusting entries made at the end of the previous period, making the accounting process smoother. Only certain types of adjusting entries can be reversed, including those for accrued income, accrued expenses, unearned revenue using the income method, and prepaid expenses using the expense method. Reversing these entries debits what was previously credited and credits what was previously debited. This summary provides an overview of reversing entries and the types that can be reversed.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Reversing Entries

    Reversing entries are made at the beginning of the new accounting period to enable a smoother
    accounting process.
    This step is optional and is especially useful to companies that use the cash basis method.
    In this step, adjusting entries made at the end of the previous accounting period are simply reversed,
    hence the term "reversing entries".
    However, not all adjusting entries qualify for this step.
    The following are the only types that can be reversed:
    1. Adjusting entry for accrued income,
    2. Adjusting entry for accrued expense,
    3. Adjusting entry for unearned revenue using the income method, and
    4. Adjusting entry for prepaid expense using the expense method.
    Adjusting entries for unearned revenue under the liability method and for prepaid expense under
    the asset method are never reversed. Adjusting entries for depreciation, bad debts and other allowances
    are also never reversed.
    Let us illustrate each of the above types.

    Reversing Entry for Accrued Income


    Example: ABC Company is to receive $3,000 interest income at the end of February 2015. It covers 3
    months starting December 1, 2014. At the end of 2014, the accountant properly makes an adjusting entry
    for one month's worth of accrued income.
    Date
    2014

    Particulars

    Dec 31 Interest Receivable


    Interest Income

    Debit

    Credit

    1,000.00
    1,000.00

    At the beginning of 2015, the accountant can prepare this reversing entry:

    Date

    Particulars

    2015

    Jan

    1 Interest Income

    Debit

    Credit

    1,000.00

    Interest Receivable

    1,000.00

    The adjusting entry is simply reversed. Debit what was credited and credit what was debited.
    When the ABC Company receives the interest income at the end of February, the accountant will then
    prepare this journal entry:
    Feb 28 Cash

    3,000.00

    Interest Income

    3,000.00

    Notice that Interest Income is credited for 3,000. Now you might be asking this: Under the concept of
    accrual, the interest income to be recognized in 2015 should be $2,000. Then why credit $3,000 Interest
    Income?
    Very good. Well, in the reversing entry at the beginning of the period, Interest Income was already
    debited for $1,000. So if we combine them ($1,000 debit and 3,000 credit), then we'll end up with $2,000
    Interest Income which is the correct amount to be recognized in 2015.
    We said that reversing entries are optional. If the accountant did not make a reversing entry at the
    beginning of the year, the accountant will have this entry upon collection of the income.
    Feb 28 Cash

    3,000.00

    Interest Receivable

    1,000.00

    Interest Income

    2,000.00

    Note: Actually, if you combine the reversing entry and journal entry for collection. You'll come up with the
    journal entry above.

    Reversing Entry for Accrued Expense


    Example: ABC Company will pay rent at the end of January 2015, covering a 3-month period starting
    November 1, 2014. The entire amount is $6,000.
    At the end of December 2014, the accountant properly prepares this adjusting entry for two months worth
    of rent expense (Nov 1 to Dec 31):

    Date

    Particulars

    2014

    Dec 31 Rent Expense

    Debit

    Credit

    4,000.00

    Rent Payable

    4,000.00

    At the beginning of 2015, the accountant can prepare this reversing entry:
    Date

    Particulars

    2015

    Jan

    1 Rent Payable

    Debit

    Credit

    4,000.00

    Rent Expense

    4,000.00

    Again, notice that the adjusting entry is simply reversed.


    When the company pays the entire rent, the accountant will then prepare this journal entry:
    Jan 31 Rent Expense

    6,000.00

    Cash

    6,000.00

    In effect, Rent Expense for 2015 is $2,000 even if the accountant debits $6,000 upon payment. This is
    because of the reversing entry which includes a credit to Rent Expense for $4,000.
    If the accountant did not make a reversing entry at the beginning of the year, the accountant will have this
    entry upon payment of the rent.
    Jan 31 Rent Payable

    4,000.00

    Rent Expense

    2,000.00

    Cash

    6,000.00

    There you have the first two types of adjusting entries that can be reversed. If you are having trouble
    understanding the process, don't worry. It requires some time and a little effort for the concepts to sink in.
    In part 2, we'll take a look at the other two types.

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