At the beginning of each accounting period, some accountants use reversing entries to cancel out some adjusting entries from the previous period. Reversing entries can only be made for accruals; that is, accrued revenues and accrued expenses. There is no need for reversing entries that reverse adjusting entries for deferrals (unearned revenue that has since been earned, or prepaid expenses), nor for depreciation.
Reversing entries make it easier to record subsequent transactions by eliminating the need for certain compound entries. They also make it more likely that mistakes won't be made, if the accruals from the previous period are accidentaly forgotten.
Considering the following adjusting entry that was made to record service revenue earned on a portion of a contract performed, but not yet paid.
Typically, when we complete the contract, we would have to remember that a portion of the contract has already been accrued, and subtract it from our January entry.
Or we could do a compound entry like this to show that the contract has been completed and paid, and that a portion of the contract was accrued in the previous period.
The reversing entry takes place on January 1st, and reversing the accrued revenue. When we do these, we do not have to remember that we accrued revenue from the previous period, we can simply record the transactions as we normally would in the new year.
After the reversing entry, the accountant can record the completion of the contract as usual.
Reversing Entries
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