Accounting > Reversing Entries
Reversing Entries
When an adjusting entry is made for an expense at the end of the accounting period, it is necessary to keep track of this expense so that the transaction will be allocated properly between the two periods. Reversing entries are a way to handle such transactions.
Consider the case in which a note is issued on the 16th of September, with interest payable on the 15th of October. If the total interest to be paid at the end of the 30 day period is $100, then half of the amount would be allocated to the month of September using the following adjusting journal entry:
Period-End Adjusting Entry
Date |
Account Title |
Debit |
Credit |
9/30 |
Interest Expense |
50 |
|
|
Interest Payable |
|
50 |
15 days of accrued interest. |
On October 15, the 30 days of interest will be paid as a $100 lump sum. If the bookkeeper remembers that half of that interest already was recorded as an expense in September, then he or she can record only $50 as the interest expense for October. Alternatively, a reversing entry can be made at the beginning of October as follows:
Reversing Entry
Date |
Account Title |
Debit |
Credit |
10/1 |
Interest Payable |
50 |
|
|
Interest Expense |
|
50 |
Reversing entry for 15 days |
Note that the above journal entry is exactly the reverse of the adjusting entry made on September 30. Once this reversing entry is posted, the affected ledger accounts will appear as follows:
Ledger Accounts After Reversing Entry
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The interest payable account carried a credit balance of $50 over to the new period, and this balance became zero when the October 1 reversing entry was posted. Because the interest expense ledger account was closed at the end of the reporting period on September 30 (as were all expense accounts), its balance was reset to zero at that time. After the posting of the reversing entry on October 1, the interest expense ledger account had a credit balance (i.e. a negative expense balance) of $50.
On Oct 15, the note matures and the $100 interest is due. Because the reversing entry was made on Oct 1, the Oct 15 entry is for the full $100 that is due on the note, and is recorded as follows:
October 15 Journal Entry
Date |
Account Title |
Debit |
Credit |
10/15 |
Interest Expense |
100 |
|
|
Interest Payable |
|
100 |
Interest for Sep 16 through Oct 15. |
The ledger accounts will appear as follows once the journal entries through October 15 are posted:
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The net interest expense for October then is $50, as it should be since the other $50 already was reported in September.
As can be seen in the ledger accounts, the net effect is that a $50 interest expense will be realized in October, and the full $100 of interest will be paid to the holder of the note.
Reversing entries are a useful tool for dealing with certain accruals and deferrals. Their use is optional and depends on the accounting practices of the particular firm and the specific responsibilities of the bookkeeping staff.
Accounting > Reversing Entries
