Solution of Reversing Entry Problem through Facebook Chat

Today, I got the accounting problem through Facebook chat. To use facebook chat  is very enjoyable and simple.

Student of B.Com. asked, " What is Reversing Entry?"

I could not give best answer at that time and writing now it after research on this topic.  

And my answer is

" Dear student, reversing entry in journal  is a simple technique to bring outstanding expenses on its real position. In this entry, we pass the opposite entry of outstanding expenses which we had passed end of previous year for adjustment.

Let me explain in detail :

Suppose, you are businessman and you have one employee. Your have paid $ 100 end of each month to his employee. But in the end of Dec. you paid nothing to your employee in the end of Dec. Your accountant has to close the books every Dec. What will he do. Because it is the duty of businessman to pay $ 100 end of each month and he did not pay. It means it has created liability of businessman. For showing liability in final accounts, he will pass the adjustment entry of this outstanding expenses with following way

Salary Account Dr. $ 100

Outstanding Salary Account ( Salary payable account ) Cr. $ 100

and then he will add this outstanding salary in debit side's profit and loss account's paid salary and also show it in liability side of balance sheet.

But beginning of if he did not include outstanding salary in opening entry. Then he will pass the reversing entry to show the Nil amount of outstanding salary. This entry will just opposite the above adjusting entry.

Outstanding Salary Account Dr. $ 100

Salary Account Cr. 100

Its effect will be that your salary liability will be become zero. Suppose business man paid $ 100 to his employee after one and half month ( 15 Jan. ), then accountant can pass simple payment journal entry and it will save businessman to record double.

Salary Account Dr. $ 100

Bank Account Cr. $ 100

This system is used in USA, Pakistan and many other countries. But in India, we just pass the opening journal entry and include all outstanding expenses in it. After this we pass the payment entry from direct  by debiting outstanding expenses.

Outstanding expenses Dr  $ 100

Bank Account  Cr. $ 100

Effect of both is same. It is on accountant which method will he choose.

Thanks Noman Khan for asking question.