Definition and Examples of Reversing Entries
Reversing entries are entries used in accounting to cancel or offset entries made in the previous accounting period. Reversing entries are a way to make adjustments in your financial records while maintaining the integrity of the financial records.
For example, if you posted a purchase order with the wrong quantity of products in one period, you can back out this posting using a reversing entry at the beginning of the next period. You can correct the entry, for instance, as it was billed.
How Reversing Entries Work
Reversing entries work to clear any accruals that you do not want to appear in the new accounting period.
There are many scenarios in which reversing entries come into play. One of them is when it comes to accrued employee salaries, where you will need to make a reversing entry in the following month when the salaries are actually paid.
You might also need to make a reversing entry if you mistakenly paid a vendor twice for an item, or if you made a mistake in your calculations. Even if you do not have accounting software, a reversing entry can work by adjusting the entry from credit to debit or vice versa during the current period depending on the transaction.
Another example of a reversing entry would be if you estimated expenses of $10,000 in February, but the vendor did not send the actual invoice until March. You would make a reversing entry at the beginning of the month in anticipation of the invoice, which would result in a credit in accrued expenses and a debit in expenses. Then, when the actual invoice arrives, you will record the entry, and the credit in expenses of $10,000 will be balanced to 0.
Although you record reversing entries at the beginning of the month, it is possible to have an accrual that you do not reverse immediately. Be sure to record this at the end of each month so you can reverse the entry, as this action can prevent errors in your ledger. Conducting a month-end review can help prevent mistakes in your ledger.
Types of Reversing Entries
There are two types of reversing entries – automatic reversing entries and manual reversing entries. A manual reversing entry is when you record the journal entry yourself, ensuring that you also record the appropriate entries at the end of the previous month.
With automatic reversing entries, your accounting software will automatically make a journal entry at the end of the month and record a reversing entry at the beginning of the new month. Both types of reversing entries work in the same way concerning the recording of debit and credit in your general ledger.
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Sources:
– Microsoft. “Reverse Journal Postings and Undo Receipts/Shipments.”
– Middlesex Community College. “Reversing Entries.”
Source: https://www.thebalancemoney.com/what-are-reversing-entries-5220106
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