Reversing entries: what they are and why bookkeepers use them

A reversing entry is an optional journal entry made on the first day of a new accounting period that exactly undoes one of the previous period's adjusting entries. It has the same accounts and the same amount as the adjusting entry, with the debits and credits swapped. That sounds like it would erase the adjustment, and in a sense it does, but only after the financial statements for the old period have been prepared and the books closed. The point is to make the next routine transaction easy to record.

This page explains which adjusting entries are worth reversing, walks through a full accrued-wages example with and without a reversal, and shows why both routes end in exactly the same place.

The problem reversing entries solve

Accruals are adjusting entries for amounts that built up during the period but will be paid or received in the next one: wages earned but not yet paid, interest owed but not yet due, interest earned on a note receivable, a utility bill for December that arrives in January. On December 31 the bookkeeper records the expense (or revenue) and a payable (or receivable).

Then, a few days into January, the payment happens. Without a reversal, whoever records it has to remember that part of it was already accrued, look up how much, and split the payment: part to clear the payable, the rest to this year's expense. That is easy to get wrong, especially in a business with many accruals, or where payroll is entered by someone who never saw the year-end adjustments. A reversing entry removes the need to remember. After it is posted, the payment can be recorded exactly like every other payday.

Worked example: accrued wages

Here are the facts from one of the practice problems:

Northside Print Shop's employees earn $860.00 a day in total and are paid every Friday for the five-day week, $4,300.00. December 31 was a Wednesday, so on that date the shop accrued 3 days of wages, $2,580.00.

December 31: the adjusting entry

The old year now carries the three days of wages its employees earned. After the statements are prepared, Wages Expense is closed to capital as usual, but Wages Payable, a liability, carries its $2,580.00 credit into January.

Route A: with a reversing entry

January 1, the reversal. Swap the sides of the adjusting entry:

Wages Payable is back to zero. Wages Expense, which was closed to zero at year end, now has an unusual credit balance of $2,580.00. That looks odd, but it is temporary and intended.

Friday, the payday. Record the full week the ordinary way:

Wages Expense now shows $4,300.00 debit − $2,580.00 credit = $1,720.00, which is exactly the two January days (2 × $860.00). The reversal's credit has cancelled the December share automatically.

Route B: without a reversing entry

No entry on January 1. On payday, the bookkeeper must split the payment:

Same end result: Wages Payable is zero, January's Wages Expense is $1,720.00, and Cash is down $4,300.00. The difference is only in who has to know about the accrual. In Route B, the payday entry depends on it; in Route A, the reversal handles it and the payday entry does not.

Side by side

The trap: mixing the two routes

The one thing you must not do is reverse the accrual and split the payment. If Northside reverses on January 1 and then records payday as debit Wages Payable $2,580.00, debit Wages Expense $1,720.00, the payable ends at a $2,580.00 debit (an asset that does not exist) and January's wages are understated. The opposite mix, no reversal and then a plain full-amount payday, overstates January's Wages Expense by $2,580.00 and leaves a stale credit in Wages Payable. This is why a business should apply its reversing policy consistently, and why our hardest exercise asks you to read whether a reversal was made before you record anything.

Revenue accruals reverse too

The same idea works for accrued revenue. Suppose a business holds a 12-month, 12% note receivable for $13,000.00. At December 31 it accrues six months of interest, $780.00 (debit Interest Receivable, credit Interest Revenue), and reverses it on January 1 (debit Interest Revenue, credit Interest Receivable). When the note matures and the customer pays $13,000.00 plus the full $1,560.00 of interest, the collection is recorded simply:

Interest Revenue for the new year nets to $1,560.00 − $780.00 = $780.00, the six months that belong to it.

Which entries should be reversed?

Reversing is optional, and businesses choose which adjustments to reverse. A useful rule of thumb:

• Good candidates: accruals that create a payable or receivable which will be settled by an ordinary cash entry next period: accrued wages, accrued interest expense or revenue, accrued utilities and other unbilled expenses.
• Not reversed: depreciation and the allowance for doubtful accounts, which are estimates with no later cash entry to simplify. Prepaid and unearned adjustments are usually not reversed either, unless the business first recorded the prepayment directly to an expense or revenue account.

In accounting software, many accrual entries can be marked as "auto-reversing", and the program posts the reversal on the first day of the next period. The bookkeeping logic is the same as on this page; the software just remembers for you.

Reversing an accrued expense with no fixed payday

Wages are the classic example, but the same steps apply to any accrual that will be settled by an ordinary bill. Suppose a business estimates that it used $412.00 of electricity in December, and the bill will not arrive until mid-January. On December 31 it records debit Utilities Expense $412.00, credit Accounts Payable $412.00. If it reverses on January 1 (debit Accounts Payable, credit Utilities Expense), then when the actual bill for December's usage arrives at $430.00, the clerk records it like any other bill: debit Utilities Expense $430.00, credit Accounts Payable $430.00. January's Utilities Expense nets to $18.00, the small difference between the estimate and the real bill. Without the reversal, the clerk would have to find the December estimate and split the bill by hand.

This is where reversing entries earn their keep in practice: the person entering bills in January does not need to know which ones were estimated at year end. The accrual and the reversal are made by whoever closes the books, and everyone else carries on as normal.

Where reversing entries sit in the accounting cycle

The order of the year-end steps matters. First the adjusting entries are posted and the adjusted trial balance is prepared. Then the financial statements are drawn up from it. Then the closing entries are posted and the post-closing trial balance is prepared. Only after all of that, dated the first day of the new period, come the reversing entries. Reversing before the statements are prepared would remove the accruals from the year they belong to, which defeats the purpose of making them.

Common mistakes

1. Repeating the adjusting entry instead of reversing it. A reversal swaps the sides.
2. Reversing the wrong amount, for example a full week of wages instead of the days accrued.
3. Recording a payment on January 1. No cash moves in a reversing entry.
4. Clearing the payable again after a reversal. The reversal already did that.
5. Recording only the new year's share as paid. Cash always moves for the full amount.

How the practice works

Each exercise generates new wage rates, accrual amounts or note terms. You record the entry, press Check, and your answer is compared line by line with an entry computed from the same facts; recognised mistakes get their own feedback. The lesson moves from reversing a wage accrual, to reversing any accrual (including interest revenue), to payday after a reversal, and finally to problems where you must first decide whether a reversal was made. For the adjusting entries themselves, see accrued expenses and accrued revenue.