Reversing entry

Reversing entry "is an entry made at the beginning of the next accounting period" (J. J. Weygandt, D. E. Kieso, P. D. Kimmel, 2010, p. 175). Reversing entry is the accurate opposite of the adjusting entry made in the former period (J. J. Weygandt, D. E. Kieso, P. D. Kimmel, 2010, p. 175).

The purpose of reversing entry

Before saving journal items for the deal of a new period, some business makes reversing entries, which are the exact reverse (which include amounts and accounts) of a corrective entry (J. M. Wahlen, J.P. Jones, D. Pagach, 2017, p. 3-31).

Usually a business makes reversing entries just after saving the closing entries or on the first day of the following period. A retreat entry is optional, and the target is to simplify the registration of further transactions connected with the adjusting entry. A reversing entry allows a business to routinely record the following transactions, except necessity to consider the eventually influence of the previous adjusting entry (J. M. Wahlen, J.P. Jones, D. Pagach, 2017, p. 3-31).

According to the general guideline, reversal entries should be done for adjusting items that make at the end of accounting period a new balance sheet account for transaction that will be completed in the next accounting period, in the following way (J. M. Wahlen, J.P. Jones, D. Pagach, 2017, p. 3-31).

• Adjusting items that accrue incomes which should be collect in the following accounting period
• Adjusting items that accrue expenses which should be paid in the following accounting period
• Adjusting entries that postpone costs by saving them as prepaid costs, which will be used in the following accounting period
• Adjusting items that postpone revenues for prepayment from clients by saving them as unrealized or postponed incomes which will be recognized in the following accounting period (J. M. Wahlen, J.P. Jones, D. Pagach, 2017, p. 3-31):

Reversing entries should not be done for any adjusting item that adjust the final balance of an existing balance sheet account for transactions which will not be realized during the following accounting period, in the following way(J. M. Wahlen, J.P. Jones, D. Pagach, 2017, p. 3-31):

• Adjusting entries that postpone costs by saving them primitively as assets that will not be totally consumed in the following accounting period
• Adjusting entries that postpone revenues by saving them primitively as liabilities that will not be totally recognized in the following accounting period
• Adjusting entries related to assessed items such as bad debts or depreciation

(J. M. Wahlen, J.P. Jones, D. Pagach, 2017, p. 3-31)

In some cases, it is preferring to inverse the effects of some adjusting positions by making a reversing item at the beginning of the following accounting period (D. E. Kieso, J. J. Weygandt, T.D. Warfield, 2016, p. 109).

A reversing entry is the accurate opposite of the adjusting position made in the former period. Using reversing items is an optional accounting procedure; it is not a requisite step in the bookkeeping cycle (D. E. Kieso, J. J. Weygandt, T.D. Warfield, 2016, p. 109).

Examples of Reversing entry

• Reversing entries are commonly used to reverse the effects of accrual entries. For example, a company may record an accrual entry at the end of an accounting period to recognize expenses that have been incurred but not yet paid. At the beginning of the next accounting period, a reversing entry would be made to reverse the effects of the prior period's accrual entry.
• Another example of a reversing entry is when a company records an adjusting entry at the end of an accounting period to record an expense that has already been paid. At the beginning of the next accounting period, the company will make a reversing entry to reverse the effects of the prior period's adjusting entry.
• A third example of a reversing entry is when a company records an adjusting entry at the end of an accounting period to record an asset that has been depreciated. At the beginning of the next accounting period, the company will make a reversing entry to reverse the effects of the prior period's adjusting entry.

Advantages of Reversing entry

Reversing entry is a useful tool that offers a number of advantages. These include:

• Streamlining the accounting process - Reversing entry simplifies the accounting process by reversing the adjusting entries from the previous period, eliminating the need to make those entries again.
• Improving accuracy - Reversing entries reduce the risk of errors and omissions in the financial statements, as the entries are made at the start of the new period.
• Minimizing confusion - Reversing entries ensure that all entries in the new period are in the same direction, which makes it easier to read and understand the financial statements.
• Improving efficiency - Reversing entries save time and resources as the entries are made once and are effective for the entire period.

Limitations of Reversing entry

Reversing entry is a useful tool in the accounting process, however there are certain limitations to be taken into consideration:

• The reversing entry process must be used with caution, as it has the potential to create double entries which can lead to incorrect accounting. Thus, the reversing entries must be checked for accuracy prior to being posted.
• Reversing entries cannot be used to correct errors or reverse transactions that have already been posted. Such errors must be corrected by making an adjusting journal entry to reverse the incorrect entry.
• Reversing entries can only be used to reverse an entry made in the same period. It cannot be used to reverse an entry made in a previous period.
• Reversing entries must be completed before the end of the period for which the original entry was made. Once the period has ended, it is no longer possible to make a reversing entry.
• Reversing entries can create confusion in the accounting system if not properly documented. All reversing entries should be clearly noted in the accounting system, so that they can be easily identified and tracked.

Other approaches related to Reversing entry

Reversing entry is not the only approach for adjusting entries in the accounting system. Other approaches include:

• Accrual method - when a company recognizes income and expenses when they are earned or incurred, regardless of when cash is received or paid out.
• Deferral method - when a company recognizes income and expenses when cash is received or paid out, regardless of when the income or expense was earned or incurred.
• Prepaid expenses - when a company pays for goods or services before they are used or consumed.

In summary, these are three alternatives to reversing entry - the accrual method, the deferral method, and prepaid expenses - that companies can use to make adjusting entries in the accounting system.

Reversing entry — recommended articles

Compound journal entry — Books of original entry — Closing entries — Deposits in transit — Income summary — Book of original entry — Closing the accounts — Opening entries — Nominal ledger

References

• Kieso D. E., Weygandt J. J., Warfield T.D., (2016), Intermediate Accounting, Binder Ready Version, John Wiley & Sons, Hoboken
• Wahlen J. M., Jones J.P., Pagach D., (2017), Intermediate Accounting: Reporting and Analysis, 2017 Update, Cengage Learning, Boston
• Weygandt J. J., Kieso D. E., Kimmel P. D., (2010), Financial Accounting: IFRS, John Wiley & Sons, Hoboken

Author: Kinga