Accounting: Reversing Entries
Journal entries represent detailed transactions that record financial information into a company's accounting system. Reversing entries are just one type of journal entries made by accountants. These entries tend to be less frequent than others. Most accountants use reversing entries to remove accrual entries posted previously into the company's general ledger.
Other People Are Reading
-
Accrual Entries
-
Accrual accounting requires companies to record transactions as they occur. For example, purchasing an insurance policy for the next 12 months requires companies to record an asset called prepaid insurance. Other accrual entries require companies to recognize expenses prior to their occurrence. Utility bills often come at odd times during an accounting period. To accurately reflect utility expense prior to payment, companies will record an accrued expense into the general ledger.
Reversing Entries
-
Accrual entries are simply representative of future transactions. When the real information comes in, accountants will need to reverse their accrual entries. Reversing entries will be the exact opposite of the accrual entry. For example, a utility accrual entry will debit utilities expense and credit monthly accruals. The reversing entry will credit utilities expense and debit monthly accruals to remove the entry from the general ledger.
-
Accounting Cycle
-
Reversing entries are typically part of the closing process of the accounting cycle. Accountants will review a trial balance to ensure all financial accounts are accurate. Any missing information may require accrual and reversing entries. Accountants will typically date accrual entries as the last day of the month and reversing entries as the first date of the next accounting period. For example, the accrual entry date is March 31. The reversing entry date is April 1.
Considerations
-
Companies with poor accounting practices frequently use accrual and reversing entries. This can be a sign of poor accounting practices. Rather than focusing on the timely recording of actual financial information, companies will simply make accruals to force balances in ledger accounts. This results in heavy use of reversing entries as accountants must remove accrued financial data to record the actual dollar amounts into the ledger.
-
