After the financial statements are prepared and the books are closed it is often helpful to reverse some of the adjusting entries before recording the regular transactions of the next period. Such entries are called reversing entries. A reversing entry is made at the beginning of the next accounting period and is the exact opposite of the adjusting entry made in the previous period. The recording of reversing entries is an optional step in the accounting cycle.
The purpose of reversing entries is to simplify the recording of a subsequent transaction related to an adjusting entry. The use of reversing entries does not change the amounts reported in the financial statements. What is does is simplify the recording of subsequent transactions.
Not all adjusting entries should be reserved. Reversing entries may be made for the following types of adusting entries.
Not all adjusting entries should be reserved. Reversing entries may be made for the following types of adusting entries.
- Adjusting entries for accruedrevenues No reversing entry should be made for the adjusting entry of accrued revenues if Accounts receivable account is debited in the adjusting entry.
- Adjusting entries for accrued expenses. No reversing entry should be made for the adjusting entry of accrued expenses if accounts payable is credited in the adjusting entry.
- Adjusting entries for prepaid expenses under expense method.
- Adjusting entries for unearned revenue under revenue method.
Reversing entries do not apply to the adjusting entries for prepaid expenses recorded under asset method, unearned revenues recorded under liability method, depreciation, and bad debts.