What are the pros and cons of using reversing entries?


Quick Answer

The primary drawback of using reversing entries is that if the accountant forgets to do it, revenues or expenses can end up being overstated, depending on the transaction. Benefits include a greater degree of accuracy, efficiency and simplicity in the accounting process.

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Full Answer

The purpose of journal entries is to change accounting data within financial systems. The double-entry system commonly used in today's accounting ensures that entries influence a minimum of two accounts, as one receives a credit and another receives a corresponding debit. Reversing entries change back regular entries that have already been recorded. This practice is optional but makes accounting go more smoothly.

Reversing an entry from a prior period keeps revenues and expenses from being overstated. One example would be recognizing a rental car expense from the prior month as part of closing that month. However, if the bill comes in the next month and it gets paid then, it could also be billed as an expense that month. Forgetting to reverse the entries could lead to an inaccuracy in expenses.

Another benefit is the simplicity of the process. No accounting training is needed for employees to reverse entries, and it's possible to set the process up ahead of time within a computerized accounting system.

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