When you reverse accruals, you’re canceling the prior month’s accruals. Accrual accounting matches revenue and expenses to the current accounting period so that everything is even. Accruals will continue to build up until a corresponding entry is made, which then balances out the amount. By reversing accruals, it means that if there is an accrual error, you don’t have to make adjusting entries because the original entry is canceled when the next accounting period starts. Despite this, reversing accruals are optional or can be used at any time since they don’t make a difference to the financial statement. They can be used to match revenues, expenses, and prepaid items to the current accounting period—but cannot be made for reversing depreciation or debt.
Reversing accruals can either be made automatically or manually. Manually would mean that entries are made on the first day of the month. An automatic system would mean that the entry is automatically reversed on the first day of the next accounting period.
Reversing accruals are very advantageous for large companies since they lessen the risk of double booking entries and save time because prior accrual history doesn’t need to be researched. It’s easy to keep an overview and complete the task without accounting knowledge since all it entails is canceling previous entries.
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