What is a reversing entry?

A reversing entry is made at the beginning of a new accounting period to negate the effects of an adjusting entry that was recorded in the previous period. This process simplifies the accounting for cash transactions and other entries that might typically become confusing in later periods.

When an adjusting entry is made, it impacts the financial statements, and then the reversing entry effectively cancels that adjustment out. For instance, if an accrual was made for an expense in the prior period, a reversing entry at the start of the new period will offset that accrual, allowing the actual payment of the expense to be recorded without affecting the expense account a second time. This method helps in avoiding misinterpretation of the financial records and facilitates clearer reporting in periods affected by accruals or deferrals.

The other options do not accurately define a reversing entry. Adjusting entries are not solely related to cash or eliminating accrued expenses, nor do they automatically apply to revenue recognition in the way that reversing entries function. Thus, the distinguishing factor of reversing entries is their specific role in negating previous adjustments to ensure accurate financial reporting going forward.