What are the pros and cons of reversing entries?

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Originally Posted by morgaine300

Are you just asking, or is this homework? It sounds like homework. If so, please read our guidelines:

https://www.askmehelpdesk.com/financ...-b-u-font.html

You should always make an attempt to answer the question yourself first and post your own thoughts on it. If you do that, then we can help you further and let you know if you're on the right track.

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I understand a reverse entry is the exacr opposite of adjusting entry, and I understand the reason for it is to avoid excess of an account into the next peiod, i.e Services started at end of period but not completed until beginning of next. I don't know why you would not use it. I had another classmate say they don't use it?

If you're attempting to help OP, the thread is almost two years old.

However, if you're just curious about it...

I rarely use reversing entries in real life work. The "reason" for a reversing entry is not to avoid excesses going into the next period. That sounds more like you're trying to describe an adjusting entry, not a reversing entry. (And that only partly explains an adjusting entry.)

Whether they're used in class depends on the class. They would most definitely be learned in an intermediate level class because accountants have to know their purpose.

The point of a reversing entry:
If you accrue something in 2008 and have not paid it yet, then in 2009 when you go to pay it, you'll be paying the entire thing, including both the portion you accrued in 2008 and the portion that belongs in 2009. So you have this issue of what is in what account and bothering with part expense, part payables, etc. A reversing entry relieves that hassle.

A good example of when a reversing entry can come in handy...

Say you have a note payable from Nov 1, 08. It's 6 months. Interest is 100 per month. So at Dec 31, 08 you accrue two months worth of interest, 200, by debiting interest expense and crediting interest payable.

The note is due May 1, 09. There will be $600 total interest due with the note. $200 of it (from 08) is sitting in the payable account. $400 of it needs expensed in 09. So you have to look up all this crap and know that $200 is in the payable. When the entry is made, $200 has to come out of the payable and $400 charged to interest expense. Right now it's not hard to remember that I stuck $200 into a payable, but in real life we're doing 3 trillion things at once and no one is going to remember that. So we'd constantly be having to stop and figure these things out to make proper entries.

What if instead, I reverse that entry Jan 1, 09? I would debit the interest payable, thereby just wiping it out. I would credit the interest expense $200. That's negative to an expense. (And remember, I just closed the expense to zero at year-end.) When I go to pay the loan, I simply charge the entire thing off to interest expense without having to figure out what was what. But when that is posted, the $600 expense will net against the $200 credit from the reversing entry (which I don't need to remember), and it will net at $400, which is exactly how much expense we need for 09.

If more than one person is involved in the books, then reversing entries really should be done. Especially when the accountant is making adjusting entries and the bookkeeping making daily entries doesn't know the difference. Otherwise, said accountant has to fix it all with more adjusting entries at the end of the year - not much fun really.

But, you can certainly look back at the accounts and see what's there and do the entry without it having been reversed. Nothing wrong with that if you're paying attention.

However... I've always worked for small companies and generally have been the only one doing all the work. I keep folders for each month and when I do something affecting a future month, I make a little note on scrap paper and throw it into the folder for the future month. So when I get there, I know exactly what I did.

I do reverse certain things. It's either because it's just too complicated to not reverse (like when 10 different payables become involved), or usually it's cause it's something the software is going to do (like payroll or invoices) and the software is going to just charge it like normal -- so the reversing entry has to be in place.