To illustrate, let's assume that a company had accrued interest expense of $10,000 as of December 31, the end of its accounting year. The accrual adjusting entry will record an additional $10,000 of expense to be reported on the December income statement and an additional $10,000 liability on the December 31 balance sheet.
On January 1 the account Interest Expense will begin with a zero balance, since expenses are temporary accounts that are closed at the end of each accounting year. On January 2, a reversing entry is recoded which removes the $10,000 liability and causes a $10,000 credit balance in Interest Expense. The negative amount in Interest Expense will disappear as soon as the interest portion of the January loan payment is recorded.
The accrual entry on December 31 was needed only for the December financial statements. Early in January the December 31 accrued interest must be permanently removed or reversed because the actual interest will soon be recorded. The reversing entry will assure that the interest expense amount is reported only once.
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