Final answer:
Reversing entries are journal entries made at the beginning of an accounting period to reverse adjusting entries made in the previous period. They are not required by GAAP, but many companies use them to simplify the recording process and ensure accurate financial reporting.
Step-by-step explanation:
Reversing entries are journal entries made at the beginning of an accounting period to reverse adjusting entries made in the previous period. These entries ensure that the temporary accounts, such as revenues and expenses, start each period with a zero balance. They are not required by GAAP (Generally Accepted Accounting Principles), but many companies use them to simplify the recording process and to ensure accurate financial reporting.
For example, if a company accrues $1,000 of interest expense at the end of a period but will not pay it until the following period, a reversing entry would be made to reverse the interest expense and bring the account balance back to zero. This way, the company can accurately record the interest expense in the proper period and avoid double-counting it when it is paid.
Reversing entries typically include the same accounts and amounts as the original adjusting entries but with opposite debits and credits. They are usually dated the first day of the new accounting period.