REVERSING ENTRIES For certain types of adjusting entries reversing entries are

Reversing entries for certain types of adjusting

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REVERSING ENTRIESFor certain types of adjusting entries, reversing entries are prepared asof the first day of the new accounting period. They are called reversing entriesbecause they reverse the effect of the adjusting entry to which they relate. Thepurpose of reversing entry is to simplify the first entry relating to that sameitem in the next accounting period.
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For example, the adjusting entry made by Cruz Service Center torecognize accrued salaries of P270. This adjusting entry is made to recordsalaries incurred but not yet paid. Illustrated below are the entries from January31 through February 10, the next payday, assuming (1) no reversing entry isused, and (2) reversing entry is used.(1) Entries when no reversing entry is used(2) Entries when reversing entry is usedJan. 31Feb. 1Feb. 10Salaries ExpenseSalaries PayableTo adjust theaccrued salariesNo entrySalaries PayableSalaries ExpenseCashPaid salaries ofemployees2702701,3302701,600Salaries ExpenseSalaries PayableTo adjust theaccrued salariesSalaries PayableSalaries ExpenseTo reverse the adjustingentry on Jan. 31Salaries ExpenseCashPaid salaries ofemployees2702701,6002702701,600The adjusting entries as of January 31 are the same whether or not areversing entry is used. The reversing entry dated February 1, is the exact of thereversing entry simplifies the entry made on February 10. There is no need toremember that accrued salary of P270 was already recorded. When thecompany paid P1,600, the entry is simply a debit to Salaries Expense and acredit to Cash for P1,600.The end result in the accounts is the same whether or not a reversingentry is used. The T-accounts that follow will prove this. The beginning balancein the Salaries Payable results from the adjusting entry made on January 31.(1)The T-accounts as they appear when no reversing entry is used.Salaries ExpenseSalaries PayableFeb. 101,300Feb. 10270Jan. 31270(2)The T-accounts as they appear when a reversing entry is used.Salaries ExpenseSalaries PayableFeb. 101,3301,600Feb. 1270Feb. 1270Jan. 31270Not all adjusting entries are reversed on the first day of the newaccounting period. Ideal entries for reversals are those relating to situationswhere cash is paid or received in an adjusting entry. Such items would includeaccrued expenses and unbilled revenues. We do not reverse adjustments foritems that will not result in a subsequent receipt or payment of cash, such as theadjustment for depreciation.Adjusting entries for prepaid expenses recorded under the expensemethod, and unearned revenues recorded under the revenue method arereversed. Since the closing entries made at the end of the period affect therevenue and expense accounts, reversing entries are needed to revert back tothe original method used; namely, the expense method for prepaid expense andthe revenue method for unearned revenue. A general rule to follow is that alladjusting entries that increase assets or liabilities are reversed. Adjustingentries that decrease assets and liabilities are not reversed.
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