Question

If reversing entries are used for events such as accrued payroll at year’s end, how would the company’s accounting be affected if reversing entries were not made for payroll? What are the potential consequences for the business?

Answer 1

Solution:

A reversing entry would be made for a payroll if a company has a payroll that is owed but is not paid in the same accounting period.This usually takes at the beginning of the next accounting cylcle to reverse the effects of adjusted entries from the previous period.An example of this would be if a company used a temp agency to hire employees for a short period of time at the end of the year.The payroll expense would be listed as an accrual payroll expense in the journal entry for the current period.

If you fail to reverse the accrual entry it will recognize the expense twice when the paid invoice posts to the ledger as an expense. This will cause an imbalance in the ledger. Reversing entries offset the expense in the month that it is physically paid, keeping the expense recognition accurate. The potential consequences for business are that as the expense would be posted twice  the profit would be understated and hence not showing a true and fair view of the financial performance of business during the reporting period.