Adjusting transactions that involve accrued expenses or revenues that have not been entered into the company accounts for the correct accounting period often need to be reversed. These transactions can cause problems when they are entered into the accounts twice, initially as adjusted entries and then in the following accounting period. These entries have to be reversed in order to remove the adjusted accrual entries.
Entries that reverse transactions must be dated on the first day of the accounting period that follows the period when the accrual entries are made. The reverse entries ensure that accrued amounts that belong in the previous period do not affect the accounting record for the next period. According to the Houston Chronicle, the major advantage of reversing entries is that they offset accrued expenses in the period when they are paid. This revision ensures that ledger accounts balance, otherwise transactions which are recognized twice cause an error in the ledger accounts.
Manually reversing entries allows the accountant to post reverse entries to the ledger accounts at any time of the month when there is a need to balance the ledger. Automatic reversing entries are typically made by accounting software at the end of the month.