Reversing entries primarily address temporary adjustments made at the end of an accounting period. The main types of reversing entries are:
Accrued Revenues:
These are revenues earned in one accounting period but not yet received or recorded. A reversing entry in the next period ensures the revenue is only recorded once when it’s actually received.
Accrued Expenses:
These are expenses incurred in one period but not yet paid or recorded. A reversing entry ensures that when the expense is paid in the subsequent period, it isn’t double-counted.
Prepaid Expenses:
When expenses are prepaid, they’re recorded as assets. A reversing entry is made to recognize the portion of the prepayment that relates to the usage or consumption during the period.
Unearned Revenues:
When a company receives payment for goods or services to be delivered in the future, the amount is recorded as a liability. A reversing entry is made to recognize the revenue earned during the period.