An adjusting entry is made at the end of a particular accounting period, then a reversing entry is made on the first date of the subsequent accounting period. Reversing entries are not required for all adjusting entries.
Hermanson, Edward, Maher – “Reversing entries is journal entries made on the first day of the next accounting period to reverse the effects of the adjusting entries to which they relate.”
There is no need to make a reversing entry for the adjusting entry mentioned below.
(i) If prepaid expenses are recorded as assets at the outset.
(ii) If income received in advance is initially recorded as a liability.
(iii) Assumed items – bad debt, accrued income tax and depreciation.
Reversing entries can be made for adjusting entries mentioned below.
(i) Expenses which are not yet paid and
ii) Income which are not yet receive.
(iii) Expenses paid in advance which are initially entered as expenses and income received in advance which is initially entered as income.
Necessity of Reversing Entries
1. Simple entry for similar transactions.
2. Avoiding making mistakes in the next year.
3. It simplifies the accounting of the cash settlement in the following year.
4. Reversing entries reduces the number of accounts. Don’t need any entry for advance payments or unearned income.
5. Reducing the accounting codes number.
Example of Reversing Entries
1. Unpaid expenses
Reversing Entry of Adjusting Entry of Outstanding Salary
Salaries payable Dr.
Salaries Expenses Cr.
2. Unearned revenue
To reverse the adjusting entry of the outstanding rent.
Accrued rent Dr.
Rent Revenue Cr.