 Hello, and welcome to the session in which you would look at reversing entries. What are reversing entries? Reversing entries are reversing adjusting entries, and this is an optional step. So the first thing you need to know that not all accountant, not all people in the real world prepare reversing entries, and we're going to see why. And reversing entries is reversing adjusting entries. What does that mean? It means if you don't understand adjusting entries stop, you need to have a good understanding of adjusting entries in order to understand reversing entries. Now, I do have recordings specifically about the four types of adjusting entries. We're going to be reversing if the accountant or if the business decided to do reversal, we'll reverse accrued expenses and we'll reverse accrued revenues. So all accruals can be reversed if you decide to reverse them. However, the furals, which is the third revenue and the third expenses, you only reverse them, only reverse them if the original cash transaction debited an expense or credited a revenue or revenues. What does that mean? It means for the federal revenue, when you receive money upfront, for example, you debit cash for $10,000, you're supposed to credit unearned revenue if you did not do the work yet unearned revenue under those circumstances. If you book the furl properly, then you don't have to make an adjusting entry. However, if you debited cash and you credited revenue initially when you got the cash, then you might have to do a reversal entry. So for the furl, depending on the type of the adjustment and depending on how you treated the adjustment originally, if you debited cash and credited revenue, you might have to do a reversal. If you debited expense and you credited cash, you might have to do a reversal. Otherwise, no reversal for the furls. Also, you want to keep in mind that you don't reverse depreciation expense, you don't reverse bad debt expense. Why? Because when you debit depreciation expense, the corresponding credit is accumulated depreciation. So you cannot take out the accumulated depreciation after you book the depreciation because it's part of the permanent record of the asset. Same thing with bad debt expense. When you debit bad debt expense, you credit allowance for bad debt or allowance for doubtful accounts. Under those circumstances, also, you don't back out bad debt expense you will need it. So this is an overview of reversals. Obviously, the best way to illustrate this is to actually look at an actual example. So here's what we're going to do. We're going to first show you a reversal for a cruel expense. And we're going to assume the data for the following company. This company, they paid their employees on every Friday. So last time they paid their employees on March 25th, on Friday, March 25th, this date, and they paid their employees for two weeks. So the employee worked for two weeks and they paid them on Friday, March 25th. Now, every ax equal to $500. Therefore, on March 25th, they will pay their employees $5,000. So the company will debit salaries expense on March 25th, $5,000 on March 25th, and they will credit cash for $5,000. Now, you're going to see those entries on the next slide. Just bear with me. Now, their month end is March 31st. So they have to report their numbers as of March 31st. Therefore, the employee came back to work. They work Monday the 28th, Tuesday the 29th, Wednesday the 30th, and Thursday the 31st. During those four days, the employee earned four days of salaries. However, the company did not pay them. When would the company pay them? The company will not pay them till what date? Till Friday, April the 8th. So notice here, we have to stop and we have to prepare an adjusting entry. So what is the adjusting entry? We are going to debit salaries expense $2,000. We're going to credit salaries payable $2,000 for those four days, one, two, three, four. Now we're going to fast forward and we're going to pay the employees on Friday, April the 8th. So the employees came back. They work Friday, April 1st, Friday, April the 1st, Monday, Tuesday, Wednesday, Thursday and Friday. Now we have to pay them for 10 days. So again, now we have to pay them. We credit cash $5,000. This is for April 8th and we're going to debit salaries payable, salaries payable right here. This salary is payable. $2,000. We'll need to close it. We're going to debit salaries payable $2,000. And we're going to debit salaries expense. Don't worry about the writing. You're going to see those on the next slide all in details. So we're going to debit salaries expense for the following days. So remember we have to one, two, three, four, five, six. Six times five is $3,000. We're going to debit salaries expense for $6,000. So what I did as I showed you, March the 25th right here when the employee got paid the full amount for two weeks. Then I showed you the adjusting entry for the four days that are in green. Then I showed you when they paid the entries. Now we did not talk about, we did not talk about the reversing entries first. So this is how we usually do things. Now I'm going to show you what happened if the company will prepare adjusting entries. Now before I do that, I would like to remind you whether you are a student or a CPA candidate to take a look at my website, farhatlectures.com. I don't replace your beloved CPA review course by all means. It's the best for you. However, if you are listening to me right now and you have a CPA review course, this is a signal for you that you might need additional help. And this is where I come. Farhat lectures can be a useful addition to your CPA review course. It could be a useful addition to your accounting course. That's why you are listening to me right now. So what I suggest you do is take a look at my website. Take a look at my courses, lectures, multiple choice through faults. Take a look at my CPA supplemental material, lectures, multiple choice, CPA questions. That's going to help you. And those courses are aligned with your Becker, Roger, Gleam and Wiley. I also give you access to 1500 previously released AI CPA questions with detailed solution. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation, like this recording, share it with other connect with me on Instagram, Facebook, Twitter and Reddit. And recently I started a CPA exam support group on GroupMe. Please join us. So let's take a look now at the entries. And this is what I prepared on the previous slide, which is the March 25th, which is no reversing. March 31st, where I made the adjustment. Then what's going to happen is, now I'm going to show you what happened at the end of the month. At the end of the month, we close the salaries expense. We had 5,000 and 2,000. What happened to expenses? We closed them. We credit salaries expense. We debit income summary. This is the close. Then in this example, we're assuming no reversing. Then on April 8th, again, we close salary spayable because we paid it. So salary spayable is gone. We debit salaries expense for 3,000 and we pay the employees 5,000. That's on April 8th. Now let's see what would happen if the company prepared reversing entries. Well, on March 25th, there's nothing to it. March 25th are the same. Debit salaries expense credit cash. March 31st, when we prepare the adjustment, this is the adjustment. Again, there's nothing to it. We debit salaries expense credit salary spayable, also the same. So far the same. Again, at the end of the period, we have to close our expenses. This is the closing entries, the same. So everything is so far the same. So what do we do differently when we do the reversing? After we publish the financial statements, well, we show that we have 7,000 of salaries expense. We already published the financial statement. What we do is we reverse, this is what the reversing is, the adjusting entry. And which one is the adjusting entry? Let me do it in a different color. Orange. This is the adjusting entry. This is not a good color. Let me do a purple, maybe. This is the adjusting entry. So what I do, what they do the following day, April 1st, they reverse the adjusting entry. What does it mean? Reverse it? Well, they debit salaries spayable, credit salaries expense. They do the opposite as of March 31st. Now, in the real world, when I was in practice and our software that we used, we had a box. And if you check the box, it means tell the software once the new period start, reverse the adjusting entries, and it will do it automatically. However, if you run a financial statement as of March 31st, you will see the expenses. You will see that additional 2,000 of expenses. You will see the additional 2,000 of liabilities. However, starting April 1st, you already published the financial statements, you would reverse it. Now, why are we doing all this work for simplicity? So when you pay the employees on April 8th, you credit cash 5,000 for the 10 days you debit salaries expense 5,000. Versus having a liability, reducing the liability, recording the expense, then paying cash, it's for simplicity. It's for that reason. It's for simplicity. Therefore, when you pay the employees, it's a clear cut entry. So hopefully, you see the difference between the reversing and no reversing. So what you do is you reverse the adjusting entries for simplicity purposes. It's an optional step. Now, I work this example. I just kind of remind you that this example was for a accrual expenses. Also, reverse accrual revenues. Now, if you want to take a look at my resources, we might have an example about accrual revenues, but this is accrual expenses. Now, let's take a look at deferral. And we're going to work at the deferral expense. So how does the deferral expense work? In the real world, this is how it works. When we buy supplies, we debit supplies 15,000, credit cash 15,000. And supplies is an asset. Supplies is a form of the deferral prepaid. And let's assume on December 31st, we ask our employees to count the supplies. And they told us we still have 9,000 worth of supplies on hand. Well, let's take a look at the supplies account. Supplies, let's create a T account because it's going to help us tremendously if we have a T account doing this. So let's do this. So if we have a supplies account, we started with 15. And they told us we need to have 10 left, and I'm sorry, 9 left based on the count. It means we need to expense 6,000. Therefore, we credit supplies and debit, I'm just going to put it expense, debit supplies expense. Therefore, we prepare this entry to remove 6,000 from the supplies, give them to the expense. Then at the end of the period, we debit income summary, credit expenses, to remove the expenses, to remove the expenses for the next period. This is no reversing. And this is the normal way. This is the normal way. And if you do it this way, there is no reversing because initially you debited an asset initially, not an expense. Let's assume the opposite scenario now. Let's assume the company, what they did is when they purchased that 15,000 worth of supplies, now we're working here, we're working under the reversing. What they did is they automatically debited supplies expense and they assumed they're going to spend, they're going to use up all the supplies. That's what they assumed initially. So what they did is they debited supplies expense. They debited supplies expense 15,000. At the end of the period, they did the count and they find out they still have 9,000 worth of supplies. Well, if it means they have 9,000 worth of supplies, it means they only spent 6. They thought they're going to spend 15. When they counted the supplies, what remained on hand is 9,000. It means they only spent 6. What does that mean? It means they need to reduce their expense by 9,000. They need to reduce their expense by 9,000. So I'm going to reduce my expense by 9,000 and add them to the supplies. Add the 9,000 to the supplies. Therefore, I reduce my expense by 9,000, increase my supplies by 9,000. Now what I have now and supplies expense, what's left is 6,000. Now supplies expense is only 6,000, which is the only thing that we spent. Now if supplies expense is only 6,000, again at the end of the period, I debit income summary credit supplies expense to remove it. Now what do I need to do? What do I need to do right after the period start? I go back and I expense all my supplies. So after the period ends, I go back and I expense all the supplies by debiting supplies expense 9,000, crediting supplies. Why do I do it April 1st? Because the financial statements have already been issued. So as of December 31st, I show supplies expense exactly up 6,000. But right after the new period start, I debit my supplies expense again because I know this period I need to get rid of them. Therefore, just get rid of them now and don't worry about the adjusting entry later. So this is when you have a reversing for a deferral. Now the best way to understand this little better, go to farhatlectures.com, work MCQs and look at additional resources, invest in your career, invest in your accounting education. The reason you are listening to me because you need additional information, I'm here to help you. Good luck, study hard and of course stay safe.