Why are reversing entries important

Reversing entries are usually made to simplify bookkeeping in the new year. For example, if an accrued expense was recorded in the previous year, the bookkeeper or accountant can reverse this entry and account for the expense in the new year when it is paid.

He would be double counting the expense. It might be helpful to look at the accounting for both situations to see how difficult bookkeeping can be without recording the reversing entries.

This end of the year adjusting journal entry looked like this:. Paul can reverse this wages accrual entry by debiting the wages payable account and crediting the wages expense account. This effectively cancels out the previous entry. Note: Actually, if you combine the reversing entry and journal entry for collection earlier, you'll come up with that journal entry.

At the end of December , the accountant properly prepared this adjusting entry for two months worth of rent expense Nov 1 to Dec 31 :. If the accountant did not make a reversing entry at the beginning of the year, the accountant will have this entry upon payment of the rent.

There you have the first two types of adjusting entries that can be reversed. If you are having trouble understanding the process, don't worry.

It requires some time and a little effort for the concepts to sink in. In part 2, we'll take a look at the other two types. More chapters under Accounting Basics. Automatically-reversing entries are useful for helping you track expense payments. Some reversing entries are created manually to reverse a transaction in the ledger. Reversing entries can be used when a ledger transaction posts incorrectly, or to adjust the balance of an accrual or prepaid account. You can post a manual reversing entry at any time during the month as needed to balance the ledger.

For example, if you post a cash expense to the wrong line item on the income statement, you can reverse the entry by crediting the incorrect account and debiting the correct account.

Some general ledger software provides an option to create a journal entry that will automatically reverse without any additional effort on your part. Automatically-reversing journal entries are usually posted during the monthly closing cycle, and then will reverse automatically on the first day of the new accounting period.

It will allow efficient processing of actual invoices during the current accounting period. Why are Reversal Entries Needed? Reversing entries can also be created for: Accrued revenue. The adjusting entry made for it in the previous year was debit accrued revenue and credit revenue account. The reversing entry at the beginning of this year would be to debit revenue account and credit accounts receivable account.

This would effectively create a negative amount of revenue at the beginning of this year. A few weeks into the current period, the customer is billed and so you record this by debiting accounts receivable and crediting revenue account. Prepaid expenses. The company accounts close in December. Unearned revenue.