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Reversing Entries - Part 2

In part 1, we had an introduction to reversing entries and discussed examples for accrued income and
accrued expense. This part covers the two other types unearned income and prepaid expense.

Reversing Entry for Unearned Income


If the income method is used in recording unearned income, reversing entries can be prepared. Take
note that adjusting entries for unearned income recorded using the liability method are never reversed.
Example: ABC Company recorded customer advances amounting to $5,000 in December 1, 2014. The
company uses the income method in recording unearned income.
Date

Particulars

2014

Dec 1 Cash

Debit

Credit

5,000.00

Service Revenue

5,000.00

At the end of 2014, the company rendered $2,000 worth of services. We need to set-up the unearned
income of $3,000 and bring Service Revenue to its correct balance ($2,000). The adjusting entry would
be:
Dec 1 Service Revenue

3,000.00

Unearned Revenue

3,000.00

At the beginning of 2015, the following reversing entry can be prepared:


Date
2015

Jan

Particulars

1 Unearned Revenue

Debit

Credit

3,000.00

Service Revenue

3,000.00

Notice that the adjusting entry is simple reversed.


At the end of 2015, Service Revenue will again be checked to see if there is any unearned portion and if
an adjusting entry is necessary.

Reversing Entry for Prepaid Expense


If the expense method is used in recording prepaid expense, reversing entries can be prepared. Adjusting
entries for prepaid expense under the asset method are not reversed.
Example: On December 1, 2014, ABC Company paid $7,500 of rent for 3 months starting December 1.
The expense method was used in recording this transaction.
Date

Particulars

2014

Dec 1 Rent Expense

Debit

Credit

7,500.00

Cash

7,500.00

At the end of 2014, 1 month worth of rent has already expired. Prepaid Rent should be set-up for the
remaining 2 months. The adjusting entry would be:
Dec 31 Prepaid Rent

5,000.00

Rent Expense

5,000.00

At the beginning of 2015, the following reversing entry can be prepared:


Date
2015

Jan

Particulars

1 Rent Expense

Debit

Credit

5,000.00

Prepaid Rent

5,000.00

Again, notice that the adjusting entry is simple reversed.


At the end of February, the entire rent paid has already expired. We do not need to make an entry here
since we already prepared a reversing entry.
Nonetheless, Rent Expense will be reviewed at the end of the year. Rent Expense and all other expenses
will be checked to see if there are any unexpired portions which will require adjusting entries.