Why do accruals reverse

If you expect to keep an accrual for a long period of time before reversing it, then make note of the accrual in the journal entry records, and review it as part of every month-end closing process until it is reversed. This is also a good reason to conduct account reconciliations for all balance sheet accounts at regular intervals, which will detect unreversed entries. Accounting Books. Finance Books. Operations Books. Books Listed by Title.

Articles Topics Index Site Archive. About Contact Environmental Commitment. What is a Reversing Entry? It might be helpful to look at the accounting for both situations to see how difficult bookkeeping can be without recording the reversing entries.

This end of the year adjusting journal entry looked like this:. Paul can reverse this wages accrual entry by debiting the wages payable account and crediting the wages expense account. This effectively cancels out the previous entry. Yes, we did. This reversing entry actually puts a negative balance in the expense. See how easy that is? Once the reversing entry is made, you can simply record the payment entry just like any other payment entry.

Since half of the wages were expensed in December, Paul should only expense half of them in January. Weygandt and Terry D. In the event of an accrual error, reversing accruals eliminate the need to make adjusting entries because the original entry is canceled at the beginning of the next accounting period. Reversing accruals are optional and can be implemented at any time because they do not affect the financial statements.

Accruals can be used to match revenue, expenses and prepaid items to the current accounting period. Accruals cannot be made for depreciation or bad debt expense. Therefore, reversing accruals cannot be used for reversing depreciation or bad debt expenses. Businesses record numerous accruals at month end. The entries can span several months and become confusing. Assume, for example, that a business has purchased supplies from a vendor but has not received invoices for several months.

The next month, an invoice is received and paid. The accountant will need to review the accrual, look at three invoices and make an adjusting entry to eliminate the paid invoice.