Name: _____________________________ Grade & Section: _____________________ Score: __________

School: ____________________________ Teacher: ____________________Subject: FABM1 - 11

LAS Writer: Leah D. Barrido Content Editor: Wilfredo A. Barluado, Principal II
Lesson Topic: Accounting Cycle Language Evaluator: Jean Carlyn B. Maceda
Learning Target: Prepare reversing Entry (ABM_FABM11-IVa-d-34). Quarter 4 Week3 LAS2
Reference: Lopez, R. Jr., 2002, Millennial Edition. Fundamentals of Accountancy, Business and
Management, Davao City, Philippines. RM LOPEZ, JR., Publishing. Publishing. pp. 250-257.

Content
Reversing Entry

The ninth phase in the accounting process is to prepare reversing entry.

Reversing entry is a journal entry that is made at the start of the next accounting period after the opening
entry and is recorded in the General Journal. There will be no reversing entry to be made for the company that
is operating for the first time. It will take place on the second year of operation. The purpose of this is to facilitate
the recording of subsequent transactions. Reversing entries are optional. The entry simply reverses the month
end adjusting entry from the period before.

What are to be Reversed?

All adjusting entries on accruals should be reversed. For deferred items adjustments, only deferrals
whose original entries follow the nominal approach of recording prepayment and pre-collection are reversed
and that is when:
a. Upon prepayment of expenses, Expense account is debited
b. Upon receipt of pre-collected income, Income account is credited
Illustration A

Accruals: ABZ Auto Repair Shop received its electric bills of December 20A on January 20B in the amount of
P8,000. The accounting period ends on December 31, 20A.

Adjusting Entry
Dec. 31, 20A
Utilities Expense P8,000
Accrued Utilities Expenses P8,000
To record unpaid electric bills for the month of Dec. 20A
Utilities expense, which is a Nominal Account or Income Statement, is closed with other nominal
accounts at the end of the accounting period, whereas, Accrued Utility Expense, which is a Real or Balance
Sheet account, is forwarded to the next accounting period with the other accounts found in the post-closing trial
balance.

Closing Entry
Dec. 31, 20A
Income & Expense P8,000
Utilities Expenses P8,000
To record unpaid electric bills for the month of Jan. 20A

The Income & Expense Summary account is closed to Owner’s Equity account while the Utilities Expense
account is already closed as shown in the General Ledgers as follows:

Utilities Expense Accrued Utilities Expense

Debit Credit Debit Credit
AJE P8,000 CE P8,000 AJE P8,000

Accounting Period 20B – At the beginning of the next accounting period 20B, the Accrued Utilities Expenses
account is open with the following posting:
Accrued Utilities Expense Illustration B - Reversing Entry
Debit Credit Jan. 1, 20B Accrued Utilities Expense P8,000
Jan.1 P8,000 beg. balance Utilities Expense P8,000
To reverse the adjusting entry on Dec. 31, 20A
After posting this entry to their respective General Ledgers, the Accrued
Utilities Expense account is closed while the Utilities Expenses account will
show a credit balance which is not at its normal balance.

The normal balance of an expense account is debit. General Ledgers accounts are shown below:
Accrued Utilities Expense Utilities Expense
Jan. 1 20B Jan 1. 20B P8,000 RE
RE P8,000 Beg. Bal P8,000
 Therefore, the above reversing entry closes, the Accrued Utilities Expense and restores the Utilities Expense
but not at its normal balance. The credit entry of P8,000 will later on be debited upon payment of bills.

Let’s assume that the bills will be paid on January 15, 20B
Jan. 15, 20B Utilities Expense P8,000
Cash in Bank P8,000
To record bills payment.
The ledger of Utilities Expense will become, “zero” balance upon the recording of payment:
Utilities Expense This is the reason why we have to prepare a Reversing Entry.
Upon Payment
P8,000 P8,000 RE “To provide convenience of recording the subsequent transaction”.

Activity#1: On September 1, 20A, ABZ Auto Repair Shop purchased a property insurance policy that covers
the period September 1, 20A to September 1, 20B paying an annual premium of P12,000. The accounting
period ends on December 31, 20A.

Instruction: A) Prepare adjusting entries, refer on the given illustration A, answers must be written on a sheet
of bond paper. 10 points

B) Prepare reversing entries, refer on the given illustration B, answers must be written on a sheet
of bond paper. 10 points

Activity#2: Instruction: Copy and answer the activity given below. Write your answer in a piece of bond paper.
The following adjusting entries were prepared at the end of the accounting period. (Explanations are intentionally
omitted). 10 points.

ADJUSTING ENTRIES REVERSING ENTRIES

Example:
Dec. 31 20A - Rent Expense P2,000 Jan. 3120B – Accrued Rent Expense P2,000
Accrued Rent Expense P2,000 Rent Expense P2,000
To set-up unpaid rental for the To reverse the adjusting entry on
month of December 20A. Dec. 31 20A

1. Rent Expense P1500 ________________________________

Prepaid Rent P1500 ________________________________

2. Prepaid Insurance P350 ________________________________

Insurance Expense P350 ________________________________

3. Advertising Expense P850 ________________________________

Accrued Advertising Expense P850 ________________________________