Chapter2: Review of the Accounting Process
Appendix 2B: Reversing Entries
Accountants sometimes use reversing entries optional entries that remove the effects of some of the adjusting entries made at the end of the previous reporting period for the sole purpose of simplifying journal entries made during the new period. at the beginning of a reporting period. These optional entries remove the effects of some of the adjusting entries made at the end of the previous reporting period for the sole purpose of simplifying journal entries made during the new period. If the accountant does use reversing entries, these entries are recorded in the general journal and posted to the general ledger accounts on the first day of the new period.
Reversing entries are used most often with accruals. For example, the following adjusting entry for accrued salaries was recorded at the end of July 2011 for the Dress Right Clothing Corporation in the chapter:
If reversing entries are not used, when the salaries actually are paid in August, the accountant needs to remember to debit salaries payable and not salaries expense.
The account balances before and after salary payment can be seen below with the use of T-accounts.
If the accountant for Dress Right employs reversing entries, the following entry is made on August 1, 2011:
This entry reduces the salaries payable account to zero and reduces the salary expense account by $5,500. When salaries actually are paid in August, the debit is to salaries expense, thus increasing the account by $5,500.
We can see that balances in the accounts after cash payment is made are identical. The use of reversing entries for accruals, which is optional, simply allows cash payments or cash receipts to be entered directly into the temporary expense or revenue accounts without regard to the accruals made at the end of the previous period.
Reversing entries also can be used with prepayments and unearned revenues. For example, earlier in the chapter Dress Right Clothing Corporation used the following entry to record the purchase of supplies on July 6:
If reversing entries are not used, an adjusting entry is needed at the end of July to record the amount of supplies consumed during the period. In the illustration, Dress Right recorded this adjusting entry at the end of July:
T-accounts help us visualize the account balances before and after the adjusting entry.p. 90
If the accountant for Dress Right employs reversing entries, the purchase of supplies is recorded as follows:
The adjusting entry then is used to establish the balance in the supplies account at $1,200 (amount of supplies still on hand at the end of the month) and reduce the supplies expense account from the amount purchased to the amount used.
T-accounts make the process easier to see before and after the adjusting entry:
Notice that the ending balances in both accounts are the same as when reversing entries are not used. Up to this point, this approach is the alternate approach to recording prepayments discussed on page 69. The next step is an optional expediency.
On August 1, the following reversing entry can be recorded:
This entry reduces the supplies account to zero and increases the supplies expense account to $2,000. Subsequent purchases would then be entered into the supplies expense account and future adjusting entries would record the amount of supplies still on hand at the end of the period. At the end of the fiscal year, the supplies expense account, along with all other temporary accounts, is closed to retained earnings.
Using reversing entries for prepayments, which is optional, simply allows cash payments to be entered directly into the temporary expense accounts without regard to whether only the current, or both the current and future periods, are benefitted by the expenditure. Adjustments are then made at the end of the period to reflect the amount of the unexpired benefit (asset).