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A reversing entry cancels adjusting entries or corrects improperly posted journal entries. They are quite common in accounting, particularly with firms using accrual accounting. Under standard accrual accounting procedures, firms record adjusting entries to reflect accurate account balances. Once the accounting period ends, a reversing entry is necessary at the beginning of the subsequent accounting period to remove the adjusting entry. This removes the entry from the general ledger and allows for the company to keep its books clean.
A common adjusting entry relates to utilities expenses. Companies using accrual accounting need to post all information into their ledgers to reflect expenses. As utility bills can come at infrequent times, a company may need to post an entry to reflect the expected charge. The standard entry for this would be a debit to utilities expenses and a credit to month-end accruals, a liability account. The entry usually carries the last day of the accounting period as its posting date.
The reversing entry for the utilities accrual has a date listed as the first of the subsequent accounting period. For example, the utilities accrual posts on March 31 and the reversing entry on April 1. The second entry removes the accrual entry from the ledger. The accrual entry is simply informational; it carries no true value for the firm as it does not reflect any actual expense or activity.
Another use of reversing entries is to correct errors posted in a company’s general ledger. Errors can happen quite frequently in a company’s accounting process. These errors may result in improperly posted dollar amounts, information posted to wrong accounts, or entries double-posted into the general ledger. To correct the error, an accountant simply reverses the entry by listing the original debit and credit from the original entry in an opposite format. For example, an entry is posted incorrectly as a debit to office supplies expenses and a credit to cash; to correct this, an accountant credits office supplies expenses and debits cash.
A company that makes frequent use of the reversing entry process may need to reevaluate its overall accounting process. Accruals can be a sign of poor record keeping as they do not receive bills on time or post them in a timely manner. Frequent errors posted into the general ledger are also a poor reflection. It means a company does not have proper oversight and accountants are not recording information as they should.