Reversing Entry

A reversing entry is a journal entry made to nullify a previous journal entry, thereby preventing errors caused by the previous entry.
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Reversing Entry (Journal Entry)

Definition

A reversing entry is a journal entry made at the beginning of an accounting period that reverses a previous adjusting entry. By doing so, the reversing entry ensures that the balances of the accounts impacted by the prior adjustment are brought back to their pre-adjustment states. This practice is used to simplify accounting and to prevent errors that might result from duplicate entries or misunderstandings of the prior period’s adjustments.

Examples

  1. Accrued Salaries

    • In December, a company accrues $5,000 for salaries earned by employees but not yet paid. The entry made would be:
      • Debit Salaries Expense $5,000
      • Credit Salaries Payable $5,000
    • In January, the company pays this amount, and the reversing entry made would be:
      • Debit Salaries Payable $5,000
      • Credit Salaries Expense $5,000

  2. Unearned Revenue

    • A company receives $10,000 in December for services to be performed in the next fiscal period. The initial entry would be:
      • Debit Cash $10,000
      • Credit Unearned Revenue $10,000
    • In January, upon performing the services and recording the revenue, the reversing entry made would be:
      • Debit Unearned Revenue $10,000
      • Credit Revenue $10,000

Frequently Asked Questions (FAQs)

  1. Why are reversing entries important?

    • They help to ensure that financial statements are accurate and free of errors by nullifying prior adjusting entries, thereby preventing double counting.

  2. When are reversing entries typically made?

    • These entries are usually posted at the beginning of a new accounting period.

  3. Do all adjusting entries require reversing entries?

    • No, only those entries that affect temporary accounts and that need adjustment in the following period typically require reversing entries.

  4. What is the impact of not making reversing entries?

    • Not making reversing entries can lead to inaccuracies in financial statements, such as overstated or understated expenses and revenues.

  5. Are reversing entries required under GAAP?

    • While not required, making reversing entries is considered a best practice to simplify the closing process and ensure accuracy.
  • Journal Entry: A record of business transactions in an accounting system, highlighting debits and credits in a systematic format.
  • Adjusting Entry: Journal entries made at the end of an accounting period to allocate income and expenditures to the period in which they actually occurred.
  • Accrued Expense: Expenses that are recognized before they are paid in cash.
  • Deferred Revenue: Money received by a company for goods or services that have not yet been delivered or performed.

Online References for Further Reading

Suggested Books for Further Studies

  • “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
  • “Financial Accounting” by Robert Libby, Patricia Libby, and Frank Hodge
  • “Principles of Accounting” by Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso

Fundamentals of Reversing Entry: Accounting Basics Quiz

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