Is the reversal of a previous year’s accrued expense permanent?
Yes, a reversing entry is permanent.
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.
Learn more about Adjusting Entries.
About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.
| Accounting Exams |
| Bookkeeping Test |
| Business Forms |
Comments
7 Responses to “Is the reversal of a previous year’s accrued expense permanent?”
Leave a Reply
 | Free updates with your feed reader (or) receive our monthly Q&A newsletter by filling out the form below: |
Accounting Cheat Sheet
Receive our popular 15-page Cheat Sheet at no cost when
you join our free newsletter:
|
|
70,000+ have already joined We keep your email address 100% safe. | 
|
Most Recent Questions
- What are the disclosures for a manufacturer’s inventory?
- What is the advantage of using historical cost on the balance sheet for property, plant and equipment?
- What is accrued income?
- What is Subchapter S?
- What is the purpose of the cash flow statement?
- What is included in cash and cash equivalents?
- Why does the internal rate of return equate to a net present value of zero?
Questions by Category
- Debits and Credits
- Depreciation
- Financial Accounting
- Financial Ratios
- Improving Profits
- Income Statement
- Inventory and Cost of Goods Sold
- Lower of Cost or Market
- Manufacturing Overhead
- Nonmanufacturing Overhead
- Payroll Accounting
- Present Value of an Ordinary Annuity
- Present Value of a Single Amount
- Standard Costing
- Stockholders' Equity
Why AccountingCoach.com?
AccountingCoach.com is designed to help people without an accounting background easily understand accounting concepts at no cost. By investing thousands of hours, we have created clear and concise accounting information for both business people and students of all ages.
Read 1,283 Visitor Testimonials
[...] This post was mentioned on Twitter by Walter Humphry, Deirdre Morhet. Deirdre Morhet said: Is the reversal of a previous year’s accrued expense permanent? http://bit.ly/59sQr0 [...]
I think the way your illustrating this is a bit confusing. What do you mean by…
“The negative amount in Interest Expense will disappear as soon as the interest portion of the January loan payment is recorded.”
Maybe I’m misunderstanding you, but the entries for your transaction would be…
12/31
DR Interest Expense 10K
CR Interest Payable 10K
1/02
DR Interest Payable 10K
CR Cash 10K
1/31
DR Interest Expense 10K
CR Interest Payable 10K
How does the interest expense disappear? I also feel like considering an account that is naturally a debit account as being “negative”…
http://japolkcpa.com
The reversing entry on 1/02 should be DR Interest Payable and CR Interest Expense. (It should be the exact opposite of the accrual adjusting entry of 12/31). The 1/02 CR Interest Expense will cause the account Interest Expense to go from a -0- balance to a credit balance (which is opposite of the normal debit balance). When the interest bill or payment is recorded the credit balance in Interest Expense will likely become debit balance (or at least not a large credit balance).
Under your entries there will be Interest Expense recorded in December AND Interest Expense recorded in January…a double counting of the December interest.
12/31
DR Interest Expense 10K
CR Interest Payable 10K
1/02
DR Interest Payable 10K
CR Cash 10K
1/31
DR Interest Expense 10K
CR Interest Payable 10K
this is wrong entry which you considered if you see net entry.Entry should be.
1/31
Dr Interest Expenses
Cr Cash
and in
12/31 and 1/02
Interest payable is Zero after equal debit and credit.
i don’t understand the reversal of a previous year’s accrued expense permanent?
Would you show me some example in T format Account?
So confuse with entry is correct?
Final Dr Interest Expenses CR Cash right?
If you accrue for an expense, but the accrual in not enough, should the amount over and above what you accrued go right to the expense account?