Reversing entries are an optional accounting procedure which may prove useful in simplifying record keeping. A reversing entry is a journal entry to undo an adjusting entry.

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Through illustrations presented in this post you will soon see how reversing entries can simplify the overall process. Follow on…

 

First, consider this example, which does not utilize reversing entries below:
An adjusting entry was made to record $2,000 of accrued salaries at the end of 2009. The next payday occurred on January 15, 2010, when $5,000 was paid to employees. The entry on that date required a debit to Salaries Payable (for the $2,000 accrued at the end of 2009) and Salaries Expense (for $3,000 earned by employees during 2010):

Illustration without Reversing Entries

On 31-Dec-09:
[Debit]. Salaries Expense (2009) = $2,000
[Credit]. Salaries Payable = $2,000
(Adjusting entry for accrued salaries due to employees at the end of December)
Note: closing would “zero-out” all expense account at the end of 2009

On 15-Jan-10:
[Debit]. Salaries Expense (2010) = $3,000
[Credit]. Salaries Payable = $2,000
[Credit]. Cash = $5,000
(To record payroll, part of which related to prior year service)

 

Let’s revisit these facts using reversing entries. The adjusting entry in 2009 to record $2,000 of accrued salaries is the same as above. However, the first journal entry of 2010 simply reverses the adjusting entry.  On the following payday, January 15, 20X5, the entire payment of $5,000 is recorded as expense:

Illustration with Reversing Entries

On 31- Dec-09:
[Debit]. Salaries Expense (2009) = $2,000
[Credit]. Salaries Payable = $2,000
(Adjusting entry for accrued salaries due to employees at the end of December)
Note: closing would “zero-out” all expense account at the end of 2009

On 1-Jan-10:
[Debit]. Salaries Payable = $2,000
[Credit]. Salaries Expense (2010) = $2,000
(Reversing entry for accrued salaries)

On 15-jan-10:
[Debit]. Salaries Expense (2010) = $5,000
[Credit]. Cash = $5,000
(To record payment of salaries)

 

The net impact of these procedures is to record the correct amount of salary expense for 2010 ($2,000 credit and $5,000 debit, produces the correct $3,000 net debit to salaries expense).

You may find it odd to credit an expense account on January 1, because, by itself, it makes no sense. The credit only makes sense when coupled with the subsequent debit on January 15. Notice that both approaches produce the same final results.

 

In practice, reversing entries will simplify the accounting process. For example, on the first payday following the reversing entry, a normal journal entry can be made to record the full amount of salaries paid as expense -without having to give special consideration to the impact of any prior adjusting entry. Reversing entries would ordinarily be appropriate for those adjusting entries that involve the recording of accrued revenues and expenses; specifically, those that involve future cash flows. Importantly, whether reversing entries are used or not, the same result is achieved!