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Reversing Entries

Reversing entries are made at the beginning of an accounting period to reverse certain adjusting entries made at the end of the previous period. This enables a smoother accounting process. Only adjusting entries for accrued income, accrued expenses, unearned revenue using the income method, and prepaid expenses using the expense method can be reversed. Examples are provided for reversing entries for accrued income, accrued expenses, unearned revenue, and prepaid expenses.

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558 views5 pages

Reversing Entries

Reversing entries are made at the beginning of an accounting period to reverse certain adjusting entries made at the end of the previous period. This enables a smoother accounting process. Only adjusting entries for accrued income, accrued expenses, unearned revenue using the income method, and prepaid expenses using the expense method can be reversed. Examples are provided for reversing entries for accrued income, accrued expenses, unearned revenue, and prepaid expenses.

Uploaded by

Rizky Aji
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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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 only types of adjusting entries that may be reversed are those that are prepared for the
following:

1. accrued income,
2. accrued expense,
3. unearned revenue using the income method, and
4. 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.

Reversing Entry for Accrued Income


Example: ABC Company is to receive $3,000 interest income at the end of February 2018. It
covers 3 months starting December 1, 2017. At the end of 2017, the accountant properly
made an adjusting entry for one month's worth of accrued income.

Date Particulars Debit Credit


2017

Dec 31 Interest Receivable 1,000.00


Interest Income 1,000.00

At the beginning of 2018, the accountant can prepare this reversing entry:

Date Particulars Debit Credit


2018

Jan 1 Interest Income 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 2018 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 2018.

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: Suppose that ABC Company and its lessor agrees that ABC will pay rent at the end
of January 2018, covering a 3-month period starting November 1, 2017. The entire amount is
$6,000.

At the end of December 2017, the accountant properly prepared this adjusting entry for two
months worth of rent expense (Nov 1 to Dec 31):

Date Particulars Debit Credit


2017

Dec 31 Rent Expense 4,000.00


Rent Payable 4,000.00

At the beginning of 2018, the accountant can prepare this reversing entry:

Date Particulars Debit Credit


2018

Jan 1 Rent Payable 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 2017 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.

Reversing Entry for Unearned Income


If the income method is used in recording unearned income, reversing entries can be
prepared. Take note that adjusting entries for unearned income recorded using the liability
method are never reversed.

Example: ABC Company recorded customer advances amounting to $5,000 in December 1,


2017. The company uses the income method in recording unearned income.

Date Debit Credit


Particulars
2017

Dec 1 Cash 5,000.00

Service Revenue 5,000.00

At the end of 2017, the company rendered $2,000 worth of services. We need to set-up the
unearned income of $3,000 and bring Service Revenue to its correct balance ($2,000). The
adjusting entry would be:

Dec 31 Service Revenue 3,000.00

Unearned Revenue 3,000.00

At the beginning of 2018, the following reversing entry can be prepared:


Date Debit Credit
Particulars
2018

Jan 1 Unearned Revenue 3,000.00

Service Revenue 3,000.00

Notice that the adjusting entry is simple reversed.

At the end of 2018, Service Revenue will again be checked to see if there is any unearned
portion and if an adjusting entry is necessary.

Reversing Entry for Prepaid Expense


If the expense method is used in recording prepaid expense, reversing entries can be prepared.
Adjusting entries for prepaid expense under the asset method are not reversed.

Example: On December 1, 2017, ABC Company paid $7,500 of rent for 3 months starting
December 1. The expense method was used in recording this transaction.

Date Debit Credit


Particulars
2017

Dec 1 Rent Expense 7,500.00

Cash 7,500.00

At the end of 2017, 1 month worth of rent has already expired. Prepaid Rent should be set-up
for the remaining 2 months. The adjusting entry would be:

Dec 31 Prepaid Rent 5,000.00

Rent Expense 5,000.00

At the beginning of 2018, the following reversing entry can be prepared:

Date Debit Credit


Particulars
2018

Jan 1 Rent Expense 5,000.00

Prepaid Rent 5,000.00

Again, notice that the adjusting entry is simple reversed.


At the end of February, the entire rent paid has already expired. We do not need to make an
entry here since we already prepared a reversing entry.

Nonetheless, Rent Expense will be reviewed at the end of the year. Rent Expense and all
other expenses will be checked to see if there are any unexpired portions which will require
adjusting entries.

Author's Notes
And there you have the four types of adjusting entries that can be reversed. We've covered all
of them and provided examples to guide you. Again, if you are having a hard time
understanding the process, don't worry. It requires some time and a little effort for the
concepts to sink in. After all, the process will always be the same.

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