Reversing entries are journal entries intended to reverse specific accrual-based adjusting entries. As mentioned prior, accrual-based accounts must be adjusted at the end of an accounting period because of the intrinsic nature of accrual-based transactions. Accrual revenues or expenses are not reported when cash is exchanged, but whenever the transactions occur. Because revenues and expenses may be reported in one period and cash paid in another, financial statements need to accurately reflect this, by way of adjusting entries.
Reversing entries, on the other hand, counter the effect of adjusting entries. Recording entries across periods may create problems and the potential for two entries of the same transaction in two different periods. So, reversing entries removes these adjusted entries at the beginning of a new accounting period.
For example, say that an item is expensed near the end of June for $1,000. If an invoice does not arrive before the end of the month, this amount is credited to an accrued expenses account and is debited to the expense account. The expense is recorded in June’s monthly income statement and creates a negative expense in July’s monthly income statement. Therefore, entries are reversed and the accrued expenses account is debited $1,000 and the expense account is credited $1,000. When the invoice arrives in July, the expense account is debited $1,000 and accounts payable is credited $1,000. After reversing this entry, expenses are recorded when incurred, not when the invoice is received. Note that computer accounting software can automatically reverse entries for you.