However, this time, salaries payable was debited while salaries expense was credited, effectively reversing the adjusting entry. In this step, the adjusting entries that were made at the end of the previous accounting period are simply reversed, hence the term “reversing entries”. To keep your accounting records clean, you record a reversing entry on the first of the next month that turns your liability back to $0. Then, when the bill comes in for $9,500, you record a new journal entry for $9,500 in consultant fees and accounts payable. The adjusting entry reduces the unearned revenue liability by $3,600 resulting to a credit balance of $2,400.

He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

Reversing entries, or reversing journal entries, are journal entries made at the beginning of an accounting period to reverse or cancel out adjusting journal entries made at the end of the previous accounting period. Reversing entries are journal entries that are recorded at the beginning of a new accounting period to reverse certain adjusting entries that were posted at the end of the previous accounting period. The key indicator of this problem will be an accrued account receivable of $10,000 that the accounting staff should eventually spot if it is regularly examining the contents of its asset accounts.

Overview of the Accounting Cycle

In this case, because the reversing entries have already been made, there is no need to separate the payment out into the parts relating to month 1 and month 2. Bookkeepers make them to simplify the records in the new accounting period, especially if they use a “cash basis” system. The Sept. 30 accrual reflected three days of wages, but now he owes the employees for working five days. Since he reversed the accrued wages, the payroll journal entry is for the entire amount paid to employees.

Accounting with the reversing entry:

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. As before, in month 2, wages of 4,000, which includes the 1,500 from month 1, are paid, and the following journal is made. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.

You’d then have to do some accounting and arithmetic gymnastics to record the $9,500 invoice accurately. As you can see from the T-Accounts above, both accounting method result in the same balances. The left set of T-Accounts are the accounting entries made with the reversing entry and the right T-Accounts are the entries made without the reversing entry. Once the reversing entry is made, you can simply record the payment entry just like any other payment entry.

They reduce the likelihood of accounting errors

Below should be the entry to record the earned revenue on February 29, 2024. This will reduce unearned revenue to zero for this cash advance transaction since services were already fully rendered at this time. Similar to prepaid expenses, there are also two methods for recording deferred income, also called unearned income. This entry still has the same result as in the case where you posted a reversing entry since it still recognizes $2,000 rent income for 2023.

1. Businesses also use reversing entries to delete erroneously recorded transactions.
2. Making the reversing entry at the beginning of the period just allows the accountant to forget about the adjusting journal entries made in the prior year and go on accounting for the current year like normal.
3. The payroll accrual is $1,500, which accounts for three days of wages for two employees ($250 per workday x 2 employees x 3 days).
4. For example, it serves no useful purpose to reverse the depreciation adjusting entry from the previous period, only to reinstate it at the end of the current period.

This is also a good reason to conduct account reconciliations for all balance sheet accounts at regular intervals, which will detect unreversed entries. Reversing entries are optional accounting journal entries that are made at the beginning of an accounting period, to cancel adjusting entries which were made at the end of the previous accounting period. On Oct. 1, Timothy records a reversing entry, which flip-flops the debited and credited accounts. The journal entry neutralizes the Sept. 30 journal entry, making it as if it never happened, and Timothy’s salaries payable account goes back to $0. Reversing entries are made because previous year accruals and prepayments will be paid off or used during the new year and no longer need to be recorded as liabilities and assets. These entries are optional depending on whether or not there are adjusting journal entries that need to be reversed.

The need to prepare reversing entries for prepaid expenses depend on which method you use in recording prepayments. Preparing the reversing entries is the last step in the accounting cycle of the business. The Accounting Cycle refers to the steps that a company takes to prepare its financial statements. You now create the following reversing entry at the beginning of the February accounting period. This leaves the original $18,000 expense in the income statement in January, but now creates a negative $18,000 expense in the income statement in February. Accounting software automatically numbers all journal entries so that auditors can easily track deletions.

It is commonly used in situations when either revenue or expenses were accrued in the preceding period, and the accountant does not want the accruals to remain in the accounting system for another period. When the temp agency’s invoice dated January 6 arrives, the retailer can simply debit the invoice amount to Temp Service Expense and infographics credit Accounts Payable (the normal routine procedure). If the actual invoice is $18,000 the balance in Temp Service Expense will change from a credit balance of $18,000 to a balance of $0. This reversing entry should decrease the prepaid insurance account by $30,000, resulting to a zero balance again, effectively reversing the adjusting entry.

To illustrate, let’s assume that on July 1, 2023 you purchased a 12-month insurance coverage plan starting July 1 and paid an upfront fee of $60,000. Below we’ll discuss how to record reversing entries and which method it could be applied. The company will record the payment of the salary to the staff by debiting the salary expense account amounting to $ 4,200 with the corresponding credit to the cash accounting having the same amount. Taking into account the 1,500 credit balance the reversing entry has already created, the balance on the wage expense account is now equal to 2,500 (4,000-1,500), which is the amount relating to month 2 as required.

At the same time, the insurance expense account would be debited for $30,000 which corresponds to the unexpired portion. Since the $5,000 salaries expense was already closed at the end 2022, the reversing entry on the first day of the next completed contract method definition accounting period, i.e. 2023, should result in a salaries expense account having a credit balance of $5,000. Reversing entries are different journal entries that are passed to offset the journal entries which were passed at the end of the immediately preceding accounting year. I.e., they are made in the books of accounts of the company on the first day of the accounting period to remove the adjusting entries of the company’s previous accounting period, and it is the last step of the accounting cycle.