Reversing Entries In Accounting

Why to record reversing entries? Is it necessary to record these entries? Will it affect accounting process? Ahhh many questions in mind…….. Don’t worry. In this article you get all your answers. So let’s start.

In the accounting cycle, recording of reversing entries is the last step. These are opposite of adjusting entries. Adjusting entries are made to adjust the unrecorded events while reversing entries are made to cancel out those adjusting entries accounts that are created to just support these adjustments. When making adjusting entries, you create some new accounts where no new event has actually taken place, these are made just to make accounts on accrual basis. So, reversing entries are recorded at the start of the next period and these newly created accounts are reversed to cancel out the adjusting entries effect.

reversing entries in accounting

What Are Reversing Entries?

Reversing entries in accounting records at the beginning of an accounting period to cancel out or reverse the effects of adjusting entries of preceding accounting period. According to the going concern accounting principle, previous year prepayments and accruals will be used or paid off in the following year. Thus, there is no need to record these as assets and liabilities.

Reversing Entries
  • Made at the beginning of an accounting period
  • Cancel out effect of adjusting entries
  • Optional
  • Opposite of adjusting entries
  • Reduce chances of error

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Procedure of Recording Reversing Entry

As the name suggest, reversing entry is recorded by reversing the accounts nature. All of the debits and credits accounts are recorded as contra debits and credits with the same amount to “nullifying” the accounting impact. In other words, the accounts with debit nature will be credited by the same amount in the reversing entries.

Rules to Follow

After making all financial statements, including income statement, balance sheet, cash flow statement and retained earnings statement, this is a time to record reversing entries for those adjusting entries that are actually not happened (no event has occurred). So, these are some tips you shouldc follow while making reversing entries.

Accounts

Debit or Credit

Pass reversing Entry

Prepaid accounts

Debit Side

 (in adjusting entry)

Yes

Receivable accounts

Debit Side

 (in adjusting entry)

Yes

Payable accounts

Credit Side

 (in adjusting entry)

Yes

Unearned accounts

Credit Side

 (in adjusting entry)

Yes

Reversing entries are optional and it is the opposite of adjusting entries that are passed at the end of each accounting period. There is no need to reverse all the adjusting entries. Some of the adjusting entries that require reversing entry are listed below:

  1. Prepaid expense using expense method

Date

Particular

Debit

Credit

xxx

Expense

xxxx

 
 

             Prepaid Expense

 

xxxx

  1. Unearned revenue using income method

Date

Particular

Debit

Credit

xxx

Unearned Income

xxxx

 
 

            Earned Income

 

xxxx

  1. Accrued expense

Date

Particular

Debit

Credit

xxx

Salaries Payable

xxxx

 
 

             Salaries Expense

 

xxxx

  1. Accrued income

Date

Particular

Debit

Credit

xxx

Commission Income

xxxx

 
 

         Commission Receivable   

 

xxxx

Example

Assume that XYZ Company will receive $3000 rent income of three months at the end of January 2021 starting from November 1, 2020. On December 31, 2020, the company will make an adjusting entry based on accrual accounting concept to record the two months accrued rent income. The adjusting entry for accrued rent income would be:

  • Original adjusting entry

Date

Particular

Debit

Credit

Dec 31, 2020

Rent receivable   

$2,000

 

 

             Rent income

 

$2,000

  • Reversing entry

To simplify the accounting process, the accountant will create the reversing entry in order to cancel out the adjusting entry and nullifying its accounting impact. The reversing entry would be:

Reversing entry

  Date

Particular

Debit

Credit

Jan 1, 2021

Rent income    

$2,000

 

 

             Rent receivable  

 

$2,000

At the end of January 2021, XYZ Company will receive rent income of $3,000 for the three months’ time duration and accountant will create a simple journal entry to record the transaction. The entry would be:

Simple journal entry

Date

Particular

Debit

Credit

Jan  31, 2021

Cash    

$3,000

 

 

             Rent income

 

$3,000

  • How to Record Without Reversing Entry?

It is stated earlier that reversing entries are optional. Accountant can create compound journal entry for rent payable. But for this purpose, he will have to track the previous adjusting entries in his mind that will make the accounting process difficult for him. So, the compound journal entry at the time of rent collection would be:

Date

Particular

Debit

Credit

Jan 31, 2021

Cash    

$3,000

 

 

             Rent income

             Rent receivable

 

$1,000

$2,000

Benefits of Reversing Entries

  • It helps to eliminate the chance of double counting of revenues or expenses.
  • Reversing entries simplify the accounting process for accountant who wants to exclude preceding accounting period accruals in the next accounting period.
  • It also facilitates more efficient handling of the actual invoices in the new accounting period.

Key Points

  • Reversing entries in accounting records at the beginning of an accounting period to cancel out the adjusting entries of preceding accounting period.
  • They are optional. These entries help to reduce the chances of error.
  • Mostly reversing entries are made for making expenses and revenue accounts balanced.

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Hira Aziz

Hira Aziz - Author

She is a Business Content writer and Management contributor at 12Manage.com, where she contributes a business article weekly. She has over 2 years of experience in writing about accounting, finance, and business.

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