As accruals, deferrals and other adjusting entries do not relate to transactions, there is a risk that when the transaction they refer to occurs, the net financial impact will be double counted in the accounts. In order to avoid this, any adjusting entries need to be tracked into the following period, and accounted for properly during this period. One way this can be achieved is through the use of reversing entries. A reversing entry simply eliminates the balance of one of the accounts used to record an accrual or deferral, with a corresponding debit or credit to the other relevant account.
For example, in the case discussed in the adjusting entries section, if the company accrues a £600 credit in the accrued expenses account this would be treated as a liability at year end. At the start of the next year, this could be reversed by debiting the accrued expenses account by £600 and crediting the rent and rates account by £600. This would reverse the liability and account for the electricity expense in the journal account for the current period. However, whilst reversing entries can be a useful tool for ensuring that adjusting entries are treated correctly, they are an optional tool and their use would depend on the judgement of the accountant. Indeed, the accountant is free to treat accruals and deferrals from previous periods any way they like, provided they avoid double counting and the accounts are a true and fair reflection of the material value of the firm.
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