A reversing entry is a journal entry recorded at the start of a new accounting period that is the exact opposite of an adjusting entry made at the end of the previous period. It debits the accounts that the adjusting entry credited and credits the accounts it debited, for the same amounts. Its purpose is practical: it lets bookkeepers record the next related cash payment or receipt with the same routine entry they always use, without having to remember that part of it was already accrued.
Reversing entries are an optional step in the accounting cycle, made after closing entries and the post-closing trial balance. They do not change the financial statements of either period when used correctly; they only change how the bookkeeping is done. Most accounting software can create them automatically by flagging an adjustment as auto-reversing.
Which entries are reversed
Reversing entries are used mainly for accruals, the accrual-type adjusting entries that record revenue earned or expenses incurred before any cash changes hands:
- Accrued wages and salaries, as described under accrued payroll.
- Accrued interest expense on loans and interest receivable on investments.
- Accrued utilities or other accrued expenses where the invoice will arrive in the new period.
- Accrued revenue for services delivered but not yet billed.
Deferral-type adjusting entries are reversed only if the original transaction was recorded directly in an income statement account, for example if a prepayment was first debited to an expense. Adjustments for depreciation and bad debts are never reversed, because no later cash transaction will settle them.
Worked example with payroll
A company pays its staff $10,000 every two weeks, on Fridays. The year ends on Wednesday, 31 December, and the next payday is Friday, 9 January. By year end, staff have worked six of the ten days in the pay period, so $6,000 of wages has been earned but not paid.
On 31 December, the adjusting entry debits wages expense $6,000 and credits wages payable $6,000. After the books are closed, the reversing entry on 1 January debits wages payable $6,000 and credits wages expense $6,000. This clears the liability and leaves a temporary credit balance of $6,000 in wages expense.
On 9 January the payroll clerk records the full payment in the usual way: debit wages expense $10,000 and credit cash $10,000. Wages expense for the new year now shows $10,000 minus $6,000, or $4,000, which is correct because only four of the ten days were worked in January.
Without a reversing entry, the clerk must split the payment: debit wages payable $6,000, debit wages expense $4,000, credit cash $10,000. The result is identical, but the clerk has to know about the accrual. In a business with many accruals and staff who do not prepare adjustments themselves, reversing entries reduce the risk of recording the same expense twice.
Benefits and pitfalls
The main benefits are consistency and fewer errors: routine transactions are always recorded the same way, and the general ledger automatically ends up with the right balances. Reversing entries are especially helpful for interest and wages, which are paid on fixed cycles that rarely line up with month ends.
The pitfalls are mostly about control. If an accrual is reversed but the related invoice never arrives, or is recorded in a different account, the expense account is left with an unexplained credit balance. If a reversal is posted twice, or to the wrong date, results for the period are distorted. Accountants therefore review accrual accounts after the first payroll and supplier runs of each period, and they keep reversing entries for routine, predictable items rather than one-off estimates. Reversing entries are not required by US GAAP or IFRS; they are purely a bookkeeping technique, and every journal entry they create must be supported in the records like any other.