There you have the first two types of adjusting entries that can be reversed. Adjusting journal entry as the prepaid insurance expires: Prepaid Expenses Example. 2013. Assign it a name (Example: Umbrella Insurance), and choose Automatically Enter. Prepaid insurance is usually charged to expense on a straight-line basis over the term of the related insurance contract. The expense accounts were then closed, reducing net income and retained earnings by the amounts accrued at the end of January. Well, in the reversing entry at the beginning of the period, Interest Income was already debited for $1,000. Company-A paid 10,000 as insurance premium in the month of December, the insurance premium belongs to the following calendar year hence it doesn’t become due until January of the next year. Refer to the 2017 data. As per the accrual principle, only 1-month expenses can be adjusted against the income statement, and the remaining paid balance will increase the assets of the balance sheet as prepaid insurance . Without Reversing. The firm recorded the following journal entry: The balance in the Unearned Service Revenues liability account established when MicroTrain received the cash will be converted into revenue as the company performs the training services. For example, Sunny may make the following reversing accounting entry at the beginning of February before making an interest payment: Accounting Journal: Adjusting and Reversing Accounting Entry for Interest. This is due to one asset increases $1,200 and another asset decreases $1,200. The journal entry is completed this way to reverse the accrued revenue, while revenue entry remains the same, since the revenue needs to be recognized in January, the month that it … 2. Consider the following alternative sets of entries. In this step, adjusting entries made at the end of the previous accounting period are simply reversed, hence the term "reversing entries". Here are three situations that describe why adjusting entries are needed: Situation 1 Not all of a company's financial transactions that pertain to an accounting period will have been processed by the accounting software as of the end of the accounting period. A reversing entry is an optional accounting entry that is made at the beginning of the next accounting period to simplify the accounting process. The interest expense was reported in January and represents an expense accrual. E 3-20 (Adjusting and Reversing Entries)When the accounts of Constantine Inc. are examined, the adjusting data listed below are uncovered on December 31, the end of an annual fiscal period. When the company pays the interest it will debit interest expense and credit cash. The only types of adjusting entries that may be reversed are those that are prepared for the following: Adjusting entries for unearned revenue under the liability method and for prepaid expense under the asset method are never reversed. What was debited is now credited and what was credited is now debited. Also indicate the number of remaining entries. have been made to the Prepaid Insurance account, and it is now December 31 , 2013. Alternatively, the company can debit interest payable and credit cash as payments are made, and not make any reversing entries. The first adjusting accounting entry increased the insurance expense for January and decreased the prepaid insurance account by $200. For example: 1. If the accountant did not make a reversing entry at the beginning of the year, the accountant will have this entry upon collection of the income. journal entries made at the beginning of an accounting period to reverse or cancel out adjusting journal entries made at the end of the previous accounting period Event General Journal Debit Credit ,_ a. On December 1 the company debits Insurance Expense for $2,400 and credits Cash for $2,400; On the last day of December the company records an adjusting entry that debits the asset account Prepaid Insurance for $2,000 ($2,400 divided by 6 months times the 5 months that will be prepaid as of December 31) and credits Insurance Expense for $2,000 2. We said that reversing entries are optional. Depreciation is calculated as follow-(Cost x 20% x 31/ 365) = what is the amount and the journal entry for this, 2.Sales comission accrued but not paid $5000 = what is the amount and journal entry, 3.As at 30 june ($10000) reprsented the premium paid on annual policy starting on 1st may 2017. It is commonly used in situations when either revenue or expenses were accrued in the preceding period, and the accountant does not want the accruals to remain in the accounting system for another period. The prepaid insurance account shows a debit of $ 6,000, representing the cost of a 2-year fire insurance policy dated August 1 of the current year. If you are having trouble understanding the process, don't worry.