Reversing Entries
When the books have been closed and post closing trial balance has been prepared certain optional entries called reversing
entries are prepared on the first day of the next accounting period. They are prepared to simplify the recording in the next accounting
period that involves routine future cash payments or receipts. The following adjusting entries that involve routine future cash payments
or receipts are as follows:
1. Accrued Revenue
2. Accrued Expenses
3. Unearned revenue if the revenue method is used
4. Prepaid expenses if the expense method is used
Illustrative problem:
On November 1, 2011, the company has for rent an unused space in its store charging a rental of P 1,000 per month for a period of
four months. The total rent of P 4,000 (P 1,000/month x 4 months) was to be collected at the expiration of the lease contract which is
February 28, 2001
Accrued Revenue – without reversing entries
Adjusting entry:
Closing entry:
Collection:
12/31/2011
12/31/2011
02/28/2012
Rent Receivable
2,000
Rent Revenue
(To record 2 months of accrued rent revenue)
2,000
Rent Revenue
2,000
Income Summary
(To close revenue account for 2011 period)
2,000
Cash
4,000
Rent Receivable
Rent Revenue
(To record the collection for 4 month rent)
2,000
2,000
The T-accounts for the Rent Receivable and Rent Revenue account appears below after all of the above entries have been posted.
Accrued Revenue – without reversing entries
Adjusting entry:
Closing entry:
12/31/2011
12/31/2011
- same - same –
Reversing entry:
01/01/2012
Rent Revenue
Rent Receivable
Collection:
02/28/2012
2,000
Cash
Rent Revenue
(To record the collection for 4 month rent)
2,000
4,000
4,000
The T-accounts for the Rent Receivable and Rent Revenue account appears below after all of the above entries have been posted.
Note that with or without reversing entry, balances for rent receivable and rent revenue will be the same
Accrued Expense Sample – let assume that in the above problem we are the tenant and not the owner.
Accrued Expense – without reversing entries
Adjusting entry:
Closing entry:
Collection:
12/31/2011
12/31/2011
02/28/2012
Rent Expense
2,000
Rent Payable
(To record 2 months of accrued rent expense)
2,000
Income Summary
2,000
Rent Expense
(To close expense account for 2011 period)
2,000
Rent Payable
Rent Expense
Cash
(To record the payment for 4 month rent)
2,000
2,000
4,000
The T-accounts for the Rent Payable and Rent Expense account appears below after all of the above entries have been posted.
Accrued Expense – without reversing entries
Adjusting entry:
Closing entry:
12/31/2011
12/31/2011
- same - same –
Reversing entry:
01/01/2012
Rent Payable
Rent Expense
Collection:
02/28/2012
2,000
Rent Expense
4,000
Cash
(To record the collection for 4 month rent)
2,000
4,000
The T-accounts for the Rent Payable and Rent Expense account appears below after all of the above entries have been posted.
Note that with or without reversing entry, balances for rent receivable and rent revenue will be the same
Unearned Revenue Using Revenue Method – sample problem
Assume that the income method was used in recording five months rent of P 15,000 received in advance in November 1, 2011.
Nov
1 2011
Cash
15,000
Rent Revenue
15,0000
(To record receipt of advance payment for 5 month rental)
Dec 31, 2011
Dec 31, 2011
Rent Revenue
9,000
Unearned Rent
(To adjust rent revenue account for 2011 period)
9,000
Rent Revenue
6,000
Income Summary
(To close the revenue account for 2011 period)
6,000
The adjusting entry under the income method may be reversed at the beginning of the next accounting period to recognize the
realization of the unearned rent during such period. The reversing entry is as follows:
Jan 01, 2012
Unearned Rent
Rent Revenue
9,000
9,000
T-accounts for Unearned Rent and Rent Revenue after the above entries have been posted appears as follows:
The unearned rent of P 9,000 will be realized in 2011. Such realization is conveniently recorded by simply reversing the
adjusting entry made on December 31, 2011
Prepaid Expense using Expense Method – sample problem
Asumme that the expense method was used in recording five months rent of P 18,000 paid in advance on November 1, 2011. The
journal entries on November 1, 2011 to record the payment of rent and the adjusting entry and closing entry on December 31, 2011 the
end of accounting period are as follows:
Nov 1
Dec 31
Rent Expense
Cash
18,000
Prepaid Rent
Rent Expense
(P 18,000 x 3/5)
10,800
Income Summary
Rent Expense
7,200
18,000
10,800
7,200
The adjusting entry under the expense method maybe reversed at the beginning of the following accounting period to recognize the
expense from the prospective consummation of the prepaid expense within such period. The reversing entry is as follows:
Rent Expense
Prepaid Rent
10,800
10,800
The T-accounts for Prepaid Rent Expense after the above entries have been posted appears as follows: