Accounting Practices 501 Chapter 8 Reversing entries Cathy Saenger, Senior Lecturer, Eastern Institute of Technology © Pearson 2011

Reversing Entries Ch8H - Reversing entries 2 What do you think happens with the Current Asset and Current Liability accounts created during balance day adjustments? Prepaid Expenses Accrued Expenses Accrued Income Income in Advance ? They have to be reversed to the original income and expense accounts in the new period

Ch8H - Reversing entries 3 Reversing Entries Let’s say we have the above opening balances at the start of a new accounting period (1 April) O/balances DrCr Prepaid expenses (Rent)500 Accrued expenses (Wages)300 Accrued income (Interest)100 Income in advance (Commission)600 These are temporary asset and liability accounts created with balance day adjustments

Ch8H - Reversing entries 4 O/balancesReversingAfter DrCrDrCr Prepaid expenses (Rent)500 Accrued expenses (Wages)300 Accrued income (Interest)100 Income in advance (Commission)600 Reversing Entries At the start of a new financial period, the above accounts have to be reversed back to the original income and expense accounts.

Ch8H - Reversing entries 5 O/balancesReversingAfter DrCrDrCr Prepaid expenses (Rent)500 Accrued expenses (Wages)300 Accrued income (Interest)100 Income in advance (Commission)600 The Prepaid expenses (Rent) account is reversed to the Rent expense account in the new accounting period (starting on 1 April) 500 Rent NIL

Ch8H - Reversing entries 6 O/balancesReversingAfter DrCrDrCr Prepaid expenses (Rent)500 Accrued expenses (Wages)300 Accrued income (Interest)100 Income in advance (Commission) Rent NIL General Journal Date Account Titles Ref noDebitCredit 1/4 Rent500 Prepaid expenses (Rent) 500 Being entry required to reverse prepaid rent

Ch8H - Reversing entries 7 O/balancesReversingAfter DrCrDrCr Prepaid expenses (Rent)500 Accrued expenses (Wages)300 Accrued income (Interest)100 Income in advance (Commission)600 The Accrued expenses (Wages) account is reversed to the Wages account in the new accounting period (starting on 1 April) 500 Rent NIL 300 NIL Wages

Ch8H - Reversing entries 8 O/balancesReversingAfter DrCrDrCr Prepaid expenses (Rent)500 Accrued expenses (Wages)300 Accrued income (Interest)100 Income in advance (Commission) Rent NIL 300 NIL Wages General Journal Date Account Titles Ref noDebitCredit 1/4 Accrued expenses (Wages)300 Wages 300 Being entry required to reverse wages accrued

Ch8H - Reversing entries 9 O/balancesReversingAfter DrCrDrCr Prepaid expenses (Rent)500 Accrued expenses (Wages)300 Accrued income (Interest)100 Income in advance (Commission)600 The Accrued income (Interest) account is reversed to the Interest income account in the new accounting period (starting on 1 April) 500 Rent NIL 300 NIL Wages 100 Interest income NIL

Ch8H - Reversing entries 10 O/balancesReversingAfter DrCrDrCr Prepaid expenses (Rent)500 Accrued expenses (Wages)300 Accrued income (Interest)100 Income in advance (Commission) Rent NIL 300 NIL Wages 100 Interest income NIL General Journal Date Account Titles Ref noDebitCredit 1/4 Interest income100 Accrued income (Interest) 100 Being entry required to reverse interest accrued

Ch8H - Reversing entries 11 O/balancesReversingAfter DrCrDrCr Prepaid expenses (Rent)500 Accrued expenses (Wages)300 Accrued income (Interest)100 Income in advance (Commission)600 The Income in advance (Commission) account is reversed to the Commission income account in the new accounting period (starting on 1 April) 500 Rent NIL 300 NIL Wages 100 Interest income NIL 600 Commission income NIL

Ch8H - Reversing entries 12 O/balancesReversingAfter DrCrDrCr Prepaid expenses (Rent)500 Accrued expenses (Wages)300 Accrued income (Interest)100 Income in advance (Commission) Rent NIL 300 NIL Wages 100 Interest income NIL 600 Commission income NIL General Journal Date Account Titles Ref noDebitCredit 1/4 Income in advance (Comm)600 Commission income 600 Being entry required to reverse commission received in advance

Mmmm… clear as mud! Ch8H - Reversing entries 13