Reversing Journal Entries- Explained!

Reversing journal entries in accounting are entries made at the beginning of an accounting period to reverse adjusting entries from the end of the previous period. They are typically used for accruals and deferrals to simplify the process of recording transactions across accounting periods.

Here's how they work:

• Original Adjusting Entry: At the end of an accounting period, adjusting entries are made to record accruals (revenue or expenses recognized but not yet recorded) or deferrals (revenue or expenses recorded but not yet recognized).

• Reversing Entry: At the beginning of the next accounting period, reversing entries are entered to cancel out the effect of the adjusting entries made in the previous period. These entries are typically the exact opposite of the original adjusting entries.

• Purpose: Reversing entries make it easier to manage transactions that cross accounting periods. They simplify the accounting process because they eliminate the need to handle accruals and deferrals manually throughout the new period, ensuring that the transactions are recorded in the correct period.

• Example: Suppose at the end of December, an accrual entry is made to recognize revenue earned but not yet received. In January, a reversing entry would be made to cancel out that accrual, so that only the actual cash received in January is recorded as revenue for that period

In essence, reversing journal entries help maintain accuracy and simplify accounting processes by automatically adjusting for accruals and deferrals from the previous period at the start of the new period.