Reversing Entries Why are Reversal Entries Needed?, Example

reversing entries examples

This is an optional step in the accounting cycle and if the bookkeeper wishes can skip it entirely. Reversing entries are optional and relate to bookkeeping technique. Reversing entries are commonly used to show the expenses incurred by a business as reflected on financial statement.

What is an example of a reversing entry?

If a company had a $500.00 advertising campaign that began in March but finished in April and the bill for this will not be sent to the company until April, assuming the March portion of the expense is $200.00, the journal entry to accrue for this advertising expense will be a debit to Advertising Expense for $200 and a credit to Accrued Expenses for the same amount. The reversing entry, to be entered on April 1, would then be a debit to Accrued expenses for $200 and a credit to Advertising Expenses for the same amount.

Following the double-entry system used in modern accounting, these entries always affect at least two accounts — one account is debited, while another account is credited. A reversing entry is a journal entry that inverts a previously recorded “regular” entry.

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For example, you may want to include payroll tax liabilities in December but enter the paycheck itself in January. Reversing an entry from a previous financial period prevents any duplications of revenue or expenses, thus increasing the accuracy on your financial statements come year end. Reversing entries are financial journal entries made at the beginning of a financial period to reverse or cancel out adjusting entries made at the end of the previous financial period. When your spouse sends out invoices on April 3, the accounting software automatically records another $2,000 in accounts receivable for the same client.

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Get started with one of our top business credit card picks of 2022 today. The Revenue Recognition Principle – requires that a company recognize revenue when it is earned, rather than when it is billed and paid for by the customer. Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. Rebecca McClay is a financial content editor and writer specializing in personal finance and investing topics. For more than 15 years, she’s produced money-related content for numerous publications such as TheStreet and MarketWatch, and financial services firms like TD Ameritrade and PNC Bank.

On January 31, the accrual for the first 33.5 hours must be entered to have the books more accurately reflect when the revenue was earned. On February 1, this entry must be reversed in order to simplify the process of entering the invoice payment, once it comes in later in the month. Until the actual revenue or expense is recorded, the books will not reflect reality. This is acceptable because it happens within a one-month accounting period, and by the end of the month, when the books close, the actual will have been posted and the books will be up to date once more. The adjustment would consist of a $150 debit to the wages expense account and a $700 credit to the wages payable account. Because of the simplicity of the recording of the reversing entries. That’s because the account debited originally in the books of accounts is credited in the reversing entries with the same amount, and the account credited, is debited in the reversing entries, with the same amount.