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pg_0064 - Accounting without Reversing Entries The path...

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Unformatted text preview: Accounting without Reversing Entries The path down the left side of Exhibit 3C.1 is described in the chapter. To summarize here, when the next payday occurs on January 9, we record payment with a compound entry that debits both the expense and liability accounts and credits Cash. Posting that entry creates a 5490 balance in the expense account and reduces the liability account balance to zero because the debt has been settled. The disadvantage of this approach is the slightly more complex entry required on January 9. Paying the accrued liability means that this entry difi'ers from the routine entries made on all other paydays. To construct the proper entry on January 9, we must recall the efl'ect of the December 31 adjusting entry. Reversing entries overcome this disadvantage. Accounting with Reversing Entries P8 Prepare reversing entries and explain their purpose. The right side of Exhibit 3C.1 shows how a reversing entry on January 1 overcomes the disadvantage of the January 9 entry when not using reversing entries. A reversing entry is the exact opposite of an adjusting entry. For FastForward, the Salaries Payable liability account is debited for 5210, meaning that this account now has a zero balance after the entry is posted. The Salaries Payable account temporarily understates the liability, but this is not a problem since financial statements are not prepared before the liability is settled on January 9. The credit to the Salaries Expense account is unusual because it gives the account an abnormal credit balance. We highlight an abnormal balance by circling it. Because of the reversing entry, the January 9 entry to record payment is straightforward. This entry debits the Salaries Expense account and credits Cash for the fill] S700 paid. It is the same as all other entries made to record 10 days' salary for the employee. Notice that afier the payment entry is posted, the Salaries Expense account has a 5490 balance that reflects seven days' salary of 570 per day (see the lower right side of Exhibit 3C.1}. The zero balance in the Salaries Payable account is now correct. The lower section of Exhibit 3C.1 shows that the expense and liability accounts have exactly the same balances whether reversing entries are used or not. This means that both approaches yield identical results. Summary PSC Prepare reversing entries and explain their purpose. Reversing entries are an optional step. They are applied to accrued expenses and revenues. 'The purpose of reversing entries is to simplify subsequent journal entries. Financial statements are unafl'ected by the choice to use or not use reversing entries. Wmcmm nsnlgummnbmdmémdixlic. Discussion Questions 28.c How do reversing entries simplify recordkeeping? 29.: If a company recorded accrued salaries expense of $500 at the end of its fiscal year, what reversing entry could be made? When would it be made? - - - I Hort IinsiK - I Y Available W'lth McGraw-Hrll s Homework Manager M AN m “.5 I u QUICK STU DY QS 3-21C Reversing entries P8 On December 31, 2GB, Yates Co. prepared an adjusting entry for $24,” ofearned but unrecorded management fees. On January 16, 3309, Yates received $37,5w cash in management fees, which included the accrued fees earned in 2008. Assuming the company uses reversing entries, prepare the January 1, 2009, reversing entry and the January 16, 2009, cash receipt entry. EXERCISES - - - . éb‘méfilbéx - - v Available W'lfll Mtfiraw—Hrll s Homework Manager M MI AGER‘, I u Exercise 3-16.C Preparing reversing entries 1’8 The following two events occurred for Tankwell Co. on October 31, 2009, the end of its fiscal year: a. Tankwell rents a building from its owner for $3,300 per month. By a prearrangement, the company delayed paying October's rent until November 5. On this date, the company paid the rent for both October and November. b. Tankwell rents space in a building it owns to a tenant for $1,050 per month. By prearrangement, the tenant delayed paying the October rent until November 8. On this date, the tenant paid the rent for both October and November. Required 1. Prepare adjusting entrieg that Tankwell must record for thme events as of October 31. 2. Assuming Tankwell does no! use reversing entries, prepare journal entries to record Tankwell's payment of rent on November 5 and the collection of rent on November 8 from m I up. ...
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