Reversing Entries

When you prepare the original accrued salary journal entry described above, you also prepare a reversing entry at the same time. The reversing entry will generally be recorded on the first day of the succeeding month and will be the mirror image of the accrual entry. That is, the reversing entry will be the exact reverse of the accrual. The account debited will be the credited and the account credited will be the debited.

A reversal entry would create a negative amount in the respective revenue and expense accounts. For accrual basis accounting, a company will only make reversing entries if it uses this method of accounting. Now let’s look at how we would handle this situation using reversing entries.

Reversing Entries

The Sept. 30 https://quick-bookkeeping.net/ reflected three days of wages, but now he owes the employees for working five days. Since he reversed the accrued wages, the payroll journal entry is for the entire amount paid to employees. If the reversing entry is made, the May 10 payroll payment can be recorded with a simple entry that increases wages expense for $200 and decreases cash for $200.

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. This eliminates the need to give special consideration to the impact of any prior adjusting entry. To illustrate reversing entries, let’s assume that a retailer uses a temporary employment agency service to provide workers from December 15 to December 29. The temp agency will bill the retailer on January 6 and the retailer is required to pay the invoice by January 10. Assuming the retailer’s accounting year ends on December 31, the retailer will make an accrual adjusting entry on December 31 for the estimated amount. If the estimated amount is $18,000 the retailer will debit Temp Service Expense for $18,000 and will credit Accrued Expenses Payable for $18,000.

The End of the Accounting Cycle

Preparing reversing entries is an optional, intermediate step between recording revenue or expenses and having cash enter or leave your business. Many business owners implement reversing entries to reduce the likelihood of double-counting revenue and expenses. Reversing entries negate previously recorded journal entries. We show you how to use reversing entries to maintain your small business accounting records more efficiently.

He is a writer, editor and has experience in public and private accounting. Stay updated on the latest products and services anytime, anywhere. If this happens, it is important to set a reminder concerning the matter so as to ensure you do remember to reverse the entry. You may occasionally have an accrual that you choose to record later. Discover the definitions of an invoice and a bill, the differences between invoices and bills, and other transaction receipts in the article. As a media, we strive to provide readers with useful quality content while allowing Appvizer to earn revenue from this content.