Gabriela H. Schneider, CMA; Northern Alberta Institute of Technology INTERMEDIATE ACCOUNTING Seventh Canadian Edition KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK Prepared by: Gabriela H. Schneider, CMA; Northern Alberta Institute of Technology 2

Using Reversing Entries C H A P T E R 3 Appendix 3A Using Reversing Entries

Learning Objectives Identify adjusting entries that may be reversed.

Reversing Entries Used to reverse two types of adjusting entries: Accrued Revenues Accrued Expenses Reversing entries are recorded and posted on the first day of the new fiscal period Reversing entries are an option

Reversing Entry Guidelines If reversing entries are used: All accrued items should be reversed All prepaid items where cash was debited or credited on the original transaction should be reversed Amortization and bad debt adjustments are not reversed

Reversing Entries – Accrual Example Given the following original, adjusting and closing entries Oct. 24 Salaries Expense 4,000 Cash 4,000 Oct. 31 Salaries Expense 1,200 Salaries Payable 1,200 Oct. 31 Income Summary 5,200 Salaries Expense 5,200 On November 8th salaries of $2,500 are paid. $1,200 of this amount relates to the salary accrual of October 31st

Reversing Entries - Accrual Example If no reversing entry were made on November 1st Nov. 8 Salaries Payable 1,200 Salaries Expense 1,300 Cash 2,500 Salary Expense for November is $1,300; and Salaries Payable now has a zero balance

Reversing Entries - Accrual Example If reversing entry is made on November 1st Nov. 1 Salaries Payable 1,200 Expense 1,200 Nov. 8 Salaries Expense 2,500 Cash 2,500 Salary Expense for November is $1,300; and Salaries Payable now has a zero balance

Reversing Entries – Prepayment Example Given the following original, adjusting and closing entries Dec. 10 Office Supplies 20,000 Cash 20,000 Dec. 31 Office Supplies Expense 15,000 Office Supplies 15,000 Dec. 31 Income Summary 15,000 Office Supplies Expense 15,000 No reversing entry necessary here. Office Supplies (Inventory) was debited in the original transaction.

Reversing Entries – Prepayment Example Given the following original, adjusting and closing entries Dec. 10 Office Supplies Expense 20,000 Cash 20,000 Dec. 31 Office Supplies 5,000 Office Supplies Expense 5,000 Dec. 31 Income Summary 15,000 Office Supplies Expense 15,000 If reversing entries are used, a reversing entry is made in order for the expense account balance to equal the unused supply cost.

Reversing Entries - Accrual Example Reversing entry on January 1st: Jan. 1 Office Supplies Expense 5,000 Office Supplies 5,000 Here, any additional office supply purchases are debited to the Office Supplies Expense account. Office Supplies inventory would then be adjusted During the year-end adjusting process.

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