Recap of Last Class

• Closing Entries
 Learning objectives
• Reversing Entries

• Closing & Opening Trial Balance

 Reversing Entries
 Reversing entries are general journal entries
that are the exact reverse of certain adjusting
entries.
 A reversing entry enables the accountant to
record routine transactions in the usual
manner, even though an adjusting entry
affecting one of the accounts involved in the
transaction has intervened.
 Types of Adjusting Entries
• Accrued Expenses (expenses payable)

• Accrued Income (income receivable)

• Prepaid Expenses

• Unearned Income
Example

• Suppose Salaries for 7 days are payable at end of

31 December 2017 amounting Rs. 250,000.

• An adjustment entry is required. This adjustment

involves an Rs. 250,000 debit to the salaries
expense and a Rs. 250,000 credit to the salaries
payable account.
 
• This is a type of adjustment entry referred to as
……………………
 Record Accrued Expenses

Date Description Ref. Debit Credit

31-12-17 Salaries Expense 23 250,000 
  Salaries Payable 37   250,000
  Record unpaid salaries for 7 days      

LEDGER

Salaries Expense
Date Description Ref. Debit Credit Balance
31-12-17 Accrued salaries for 25 - 31 December GJ3 250,000   250,000
           

Salaries Payable
Date Description Ref. Debit Credit Balance
31-12-17 Accrued salaries for 25 - 31 December GJ3   250,000 -250,000
           
Assuming we pay Rs. 400,000 for salaries on January 10 (including
salaries for January).
Then we makes a compound entry that

- decreases (debits) salaries payable by Rs. 250,000

- increases (debits) salaries expense by Rs. 150,000
- decreases (credits) cash equal to the total payment (Rs. 400,000)

Date Description Ref. Debit Credit

10-01-18 Salaries Payable   250,000 
  Salaries Expense   150,000 
  Cash     400,000
Payment of accrued salaries of Dec
  2017 & salaries for Jan 2018      
Reversing Entry for Accrued Income

Example: ABC Company is to receive $3,000 interest

income at the end of February 2018. It covers 3
months starting December 1, 2017. At the end of
2017, the accountant properly makes an adjusting
entry for one month accrued income.

Date
Particulars Debit Credit
2017
Dec 31 Interest Receivable 1,000  
    Interest Income   1,000
If Reversing Entry is Not Passed
Date
Particulars Debit Credit
2018
Feb 28 Cash 3,000  
    Interest Income   2,000
Interest Receivable 1,000
If Reversing Entry is Passed
Date
Particulars Debit Credit
2018
Jan 01 Interest Income 1,000  
    Interest Receivable 1,000

Date
Particulars Debit Credit
2018
Feb 28 Cash 3,000  
    Interest Income   3,000
Reversing Entry for Unearned Income
Example: ABC Company recorded customer advances amounting to $5,000 in
December 1, 2017. The company uses the income method in recording unearned
income.
Date
Particulars Debit Credit
2017
Dec 1 Cash 5,000  
    Income   5,000

At the end of 2017, the company rendered $2,000 worth of services. We need to
set-up the unearned income of $3,000 and bring Income to its correct balance
($2,000). The adjusting entry would be:

Dec 1 Income 3,000  

    Unearned Income   3,000
At the beginning of 2018, the following reversing entry
can be prepared:

Notice that the adjusting entry is simple reversed.

At the end of 2018, Income will again be checked to see
if there is any unearned portion and if an adjusting entry
is necessary.

Date
Particulars Debit Credit
2017
Jan 1 Unearned Income 3,000  
    Income   3,000
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.
 Reversing Entry for Prepaid Expense

Example: On December 1, 2017, ABC Company paid

$7,500 of rent for 3 months starting December 1. The
expense method was used in recording this transaction.

Date
Particulars Debit Credit
2017
Dec 1 Rent Expense 7,500  
    Cash   7,500
At the end of 2017, 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  
    Rent Expense   5,000

At the beginning of 2018, the following reversing entry can be prepared:

Again, notice that the adjusting entry is simple reversed.

Date
Particulars Debit Credit
2018
Jan 1 Rent Expense 5,000  
    Prepaid Rent   5,000
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.
Questions
Accrued expenses are considered as

A)  Asset 

B)  Liability 

C)  Gain

D)  Income

Prepaid expenses are regarded as

A)  Asset 

B)  Liability 

C)  Loss

D)  Capital
Which of the following adjusting double entries is correct for Unearned
income?

A)  DEBIT= Income, CREDIT= Unearned income 

B)  DEBIT= Unearned income, CREDIT= Income 

C)  DEBIT= Cash, CREDIT= Unearned income

D)  DEBIT= Income, CREDIT= Cash

Earned but not yet received income is treated as

A)  Asset 

B)  Liability 

C)  Loss

D)  Capital
 Closing Trial Balance
• After the closing entries are journalized
and posted, only real / permanent, balance
sheet accounts remain open.
• A closing trial balance is prepared to check
the clerical accuracy of the closing entries
and to prove that the accounting equation
is in balance before the next accounting
period begins.
Closing TB has no Nominal Accounts

100 Cash $ 6,355

110 Accounts Receivable 200
140 Supplies 25
145 Prepaid Insurance 1,100
150 Equipment 3,000
151 Accumulated Depreciation–Equipment $ 35
155 Vehicles 15,000
156 Accumulated Depreciation-Vehicles 200
200 Accounts Payable 50
210 Wages Payable 80
220 Interest Payable 79
250 Unearned Revenue 225
280 Notes Payable 10,000
300 Capital 15,011
$25.680 $25,680
•  The opening balance is the balance that
is brought forward from the end of one
accounting period to the beginning of a
new accounting period. The balances in a
business accounts at the start of a new
financial period are called the opening
balances.
 Next Class
- Source Documents

- Special Journals