I am thinking of making a game like final fantasy or chrono trigger where the screen flashes and you encounter an enemy. It seems simple enough but was wondering if there is a recommended way. I originally am planning to make it load the level and reload the level after the battle is done. However, will it load the level back the same way?

One method you can use is the save feature. Right before you perform the screen transition, you quick save the level. I think you are able to customize how you want to save and reload the level, you have the option to reload or load variables. You might want to look into this so that you wont be reloading the world map but reverting all your experience points back to before you started the fight. So the short version is:

Save game to temporary file
Perform fight
Quick load temporary file (while maintaining variables)

Do the variables reset after loading a new level?

A method you can do is to build pocket level out side the main level and just teleport(move) the player and enemy into the pocket level and out after the fight.

Duke Nukem 3d used this method of pocket areas a lot for level reasons and tricks

oh nice! I think I will try that!

Dega you are welcome.
If you do use the pocket area method keep in mind to adjust your clip ranges this will allow you to run more effects as less resources are use to render the level. Also the region functions can be helpful for making a single function for change camera and other things based on the new location of the player and kill rendering of areas outside the pocket, but they shouldn't render anyways..