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Step11 Reversing Entries

Reversing entries are optional journal entries made on the first day of an accounting period to simplify recording routine future cash payments or receipts. They reverse certain adjusting entries from the previous period, such as those related to accrued revenue, accrued expenses, unearned revenue, and prepaid expenses. This allows the pro forma revenue or expense to be recognized in the new period without having to reference the prior period balance sheet account.

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221 views

Step11 Reversing Entries

Reversing entries are optional journal entries made on the first day of an accounting period to simplify recording routine future cash payments or receipts. They reverse certain adjusting entries from the previous period, such as those related to accrued revenue, accrued expenses, unearned revenue, and prepaid expenses. This allows the pro forma revenue or expense to be recognized in the new period without having to reference the prior period balance sheet account.

Uploaded by

jii
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Reversing Entries

When the books have been closed and post closing trial balance has been prepared certain optional entries called reversing
entries are prepared on the first day of the next accounting period. They are prepared to simplify the recording in the next accounting
period that involves routine future cash payments or receipts. The following adjusting entries that involve routine future cash
payments or receipts are as follows:
1. Accrued Revenue
2. Accrued Expenses
3. Unearned revenue if the revenue method is used
4. Prepaid expenses if the expense method is used
Illustrative problem:
On November 1, 2011, the company has for rent an unused space in its store charging a rental of P 1,000 per month for a period
of four months. The total rent of P 4,000 (P 1,000/month x 4 months) was to be collected at the expiration of the lease contract
which is February 28, 2001
Accrued Revenue without reversing entries
Adjusting entry:

Closing entry:

12/31/2011

12/31/2011

Rent Receivable
2,000
Rent Revenue
(To record 2 months of accrued rent revenue)

2,000

Rent Revenue
2,000
Income Summary
(To close revenue account for 2011 period)

2,000

Collection:
4,000

02/28/2012

Cash

Rent Receivable
2,000
Rent Revenue
2,000
(To record the collection for 4 month rent)
The T-accounts for the Rent Receivable and Rent Revenue account appears below after all of the above entries have been posted.

Accrued Revenue without reversing entries


Adjusting entry:
Closing entry:

12/31/2011
12/31/2011

- same - same

Reversing entry:
Revenue

01/01/2012
Rent
2,000
Rent Receivable

2,000
Collection:
4,000

02/28/2012

Cash
Rent Revenue

4,000
(To record the collection for 4 month rent)
The T-accounts for the Rent Receivable and Rent Revenue account appears below after all of the above entries have been posted.

Note that with or without reversing entry, balances for rent receivable and rent revenue will be the same

Accrued Expense Sample let assume that in the above problem we are the tenant and not the owner.
Accrued Expense without reversing entries
Adjusting entry:

Closing entry:

Collection:

12/31/2011

12/31/2011

02/28/2012

Rent Expense
2,000
Rent Payable
(To record 2 months of accrued rent expense)

2,000

Income Summary
2,000
Rent Expense
(To close expense account for 2011 period)

2,000

Rent Payable
Rent Expense
Cash
(To record the payment for 4 month rent)

2,000
2,000
4,000

The T-accounts for the Rent Payable and Rent Expense account appears below after all of the above entries have been posted.

Accrued Expense without reversing entries


Adjusting entry:
Closing entry:

12/31/2011
12/31/2011

- same - same

Reversing entry:

01/01/2012

Rent Payable
Rent Expense

Collection:

02/28/2012

2,000

Rent Expense
4,000
Cash
(To record the collection for 4 month rent)

2,000

4,000

The T-accounts for the Rent Payable and Rent Expense account appears below after all of the above entries have been posted.

Note that with or without reversing entry, balances for rent receivable and rent revenue will be the same

Unearned Revenue Using Revenue Method sample problem


Assume that the income method was used in recording five months rent of P 15,000 received in advance in November 1, 2011.
Nov

1 2011

Dec 31, 2011

Dec 31, 2011

Cash

15,000
Rent Revenue
15,0000
(To record receipt of advance payment for 5 month rental)

Rent Revenue
9,000
Unearned Rent
(To adjust rent revenue account for 2011 period)

9,000

Rent Revenue
6,000
Income Summary
(To close the revenue account for 2011 period)

6,000

The adjusting entry under the income method may be reversed at the beginning of the next accounting period to recognize the
realization of the unearned rent during such period. The reversing entry is as follows:
Jan 01, 2012

Unearned Rent
Rent Revenue

9,000
9,000

T-accounts for Unearned Rent and Rent Revenue after the above entries have been posted appears as follows:

The unearned rent of P 9,000 will be realized in 2011. Such realization is conveniently recorded by simply reversing the
adjusting entry made on December 31, 2011

Prepaid Expense using Expense Method sample problem


Asumme that the expense method was used in recording five months rent of P 18,000 paid in advance on November 1, 2011.

The journal entries on


record the
adjusting entry
December 31,
accounting
Nov 1

Dec 31

November 1, 2011 to
payment of rent and the
and closing entry on
2011 the end of
period are as follows:

Rent Expense
Cash

18,000
18,000

Prepaid Rent
Rent Expense
(P 18,000 x 3/5)

10,800

Income Summary
Rent Expense

7,200

10,800

7,200

The adjusting entry under the expense method maybe reversed at the beginning of the following accounting period to recognize
the expense from the prospective consummation of the prepaid expense within such period. The reversing entry is as follows:
Rent Expense
Prepaid Rent
The T-accounts for Prepaid
the above entries
appears as follows:

10,800
10,800
Rent Expense after
have been posted

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