Nature of reversing entries in accounting
At the end of an accounting period (e.g., month, quarter, year), accountants prepare adjusting entries. Adjusting entries are part of accrual accounting under which all revenues and expenses must be matched (i.e., recorded in the same period) regardless of when the actual cash inflow or outflow takes place. Thus, adjusting entries only exist in accrual accounting and don’t exist in cash accounting.
Adjusting entries may relate to expenses or revenues. Examples of adjusting entries related to expenses (also called accrual liabilities) include: payroll, rent, property taxes, shipping, and interest expense accruals. Examples of adjusting entries related to revenues (accrued assets) include: accrual for services provided by not invoiced, interest income accrual, and accrual for goods shipped but not invoiced.
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