Definition of Reversal of Accrued Expense
An accrued expense typically requires an accrual adjusting entry recorded at the end of an accounting year (or any other accounting period). The accrual adjusting entry is needed to get the expense reported on the income statement for the period when the expense was incurred and as a current liability on the end-of-the-year balance sheet. After the financial statements are distributed the adjusting entry can be permanently removed.
On the first day in the next accounting period, a reversing entry will be recorded to permanently remove the accrued amounts because the actual invoice for the accrued expense will be received and processed. The reversing entry assures that the expense will be reported once on the company's financial statements.
Example of Reversal of Accrued Expense
Assume that a company incurred $10,000 of interest expense that has not yet been recorded as of December 31 (the final day of the accounting year). Therefore, a December 31 accrual adjusting entry will debit Interest Expense with this additional $10,000 and will credit Accrued Interest Payable. This will get the proper amounts on the company's income statement and balance sheet.
The account Interest Expense will begin January 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 recorded which removes the $10,000 liability and causes a $10,000 credit balance in Interest Expense. The negative amount in Interest Expense will disappear when the actual interest expense is recorded in January.