Reversing Entries

Some adjusting entries related to the previous period are reversed at the beginning of the
new accounting period. These entries, called reversing entries, are the exact opposite of the
adjusting entries made in the previous period. Although optional, many accountants prefer to
make reversing entries because they help simplify the recording of regular transactions in the
next accounting period and also help to bring back the accounts to their normal status.

Not all adjusting entries are reversed. Only the following adjusting entries need to be
reversed:

1. Adjustment for accrued expenses;

2. Adjustment for accrued revenue;

3. Adjustment for prepaid expenses when the expense method is used; and

4. Adjustment for deferred revenue when the revenue method is used.

As an illustration, assume Y Company is paying its employees every Friday for a five-
day work week. The company is adjusting and closing its books monthly. Assume further that
Jan. 26, fell on a Friday. The company’s weekly payroll amounted to P 20,000. The Wages
Expense account for the month of January is as follows:

Wages Expense
Jan. 5 20,000
12 20,000
19 20,000
26 20,000
80,000

The adjusting entry on January 31 is as follows:

Jan 31 Wages Expense 12,000

Wages Payable 12,000
 After the adjusting entry is posted Wages Expense will have a debit balance of P 92,000
and Wages Payable will have a credit balance of P 12,000.

Wages Expense Wages Payable

Jan. 26 Bal 80,000 Jan. 31 Adjusting 12,000
31 Adjusting 12,000

92,000

After the closing entries are completed, Wages Expense will have a zero balance and will
be ready for entries in the next period. Wages Payable, on the other hand, has a balance of
P 12,000.

Wages Expense Wages Payable

Jan.31 92,000 Jan.31 Closing 92,000 Jan. 31 12,000

Without a reversing entry, it is necessary to record the P 20,000 payroll on February 2 as

follows:

Feb 2 Wages Payable 12,000

Wages Expense 8,000
Cash 20,000

To record the February 2 payroll, we must refer to the January 31 adjusting entry to
determine the amount to be debited to Wages Payable and Wages Expense. In order to lessen the
chance of committing error in recording the first payroll, a reversing entry may be prepared for
accrued wages as follows:

Feb 1 Wages Payable 12,000

Wages Expense 12,000
To record reversing entry

2 Wages Expense 20,000

Cash 20,000
To record the first payroll for February.
 Analyzing the two alternatives: 1) no reversing entry is made and 2) reversing entry is
made, we can say that this will yield to the same result:

1. No reversing entry is made:

January

Wages Expense Wages Payable

Jan. 26 Bal 80,000 Jan. 31 Adjusting 12,000
31 Adjusting 12,000

92,000

In January, Wages Expense amounted to P 92,000 and Wages Payable, P 12,000.

February

Wages Expense Wages Payable

Feb 2 8,000 Feb 2 12,000 Feb 1 Balance 12,000

As of February 2, Wages Expense amounted to P 8,000. Wages Payable will have a zero
balance.

2. Reversing entry is made:

January

Wages Expense Wages Payable

Jan. 26 Bal 80,000 Jan. 31 Adjusting 12,000
31 Adjusting 12,000

92,000
 In January, Wages Expense amounted to P 92,000 and Wages Payable, P 12,000.

February

Wages Expense Wages Payable

Feb 2 20,000 Feb 1 Reversing 12,000 Feb 1 Reversing 12,000 Feb 1 Bal 12,000
8,000

As of February 2, Wages Expense amounted to P 8,000. Wages Payable will have a zero
balance.