Reversing entries in accounting are optional journal entries dated the first day of a new period that flip the prior period’s adjusting entries. Their job is narrow but useful: after you’ve accrued wages, interest, or other items at period-end, the reversal clears that accrual so your bookkeeper can record the actual cash payment or receipt as a normal, single-line entry, without having to split it between two accounts or reference last month’s adjustments. No accounting standard requires them. They exist to prevent the most common source of period-end errors, which is double-counting an expense or revenue that straddles two periods.
Which Adjustments to Reverse
The working rule is short: reverse accruals, skip most deferrals, and never reverse depreciation. What sits behind that rule is whether a cash event in the next period will naturally resolve the balance you created at period-end.
Accrued Expenses and Revenues
These are the standard candidates. Accrued expenses cover wages earned but not yet paid, utility bills that haven’t arrived, or interest building on a loan. Accrued revenues cover income you’ve earned but haven’t collected, like interest on a savings account or fees for consulting work already delivered but not yet invoiced. In both cases, the adjusting entry puts the economic event in the right period, and the reversal clears the way for a clean cash entry in the next one.
Deferrals
Whether to reverse a deferral depends on how the original cash entry was recorded. If prepaid rent went to a balance sheet account when paid (the asset method), or cash received went to a liability account (the liability method), the period-end adjustment moves a portion into the income statement, and no single upcoming cash event resolves what’s left. Don’t reverse these.
Some companies do the opposite: they record the entire prepayment straight to Rent Expense when paid, or record all cash received directly as revenue. Under those methods, the year-end adjustment moves the unconsumed or unearned portion onto the balance sheet, and that adjustment does get reversed. If a company paid $7,500 covering three months of rent and recorded the full amount as Rent Expense, the year-end adjustment would shift the two unused months ($5,000) into Prepaid Rent. The January 1 reversal moves that $5,000 back into Rent Expense, matching how the original payment was recorded.
Depreciation and Amortization
Never reversed. These entries allocate the cost of a long-lived asset across its useful life. No upcoming cash transaction settles them, so a reversal would just distort the asset’s carrying value.
How to Record a Reversing Entry
The mechanics are simple: take the adjusting entry, swap every debit and credit, keep the dollar amounts identical, and date the result the first day of the new period. If the adjustment debited an expense and credited a liability, the reversal debits the liability and credits the expense. The result is a temporary “wrong-looking” balance, an expense account with a credit balance or a revenue account with a debit balance, that corrects itself the moment the actual cash transaction posts.
A few practical points trip people up:
- Match the original amount exactly. If you accrued $2,000, you reverse $2,000, even if the actual bill turns out to be different.
- Date the reversal the first day of the new period, not the last day of the old one.
- Give each accrual its own reversal. Don’t net several accruals into one entry.
- Label or cross-reference each reversal to the adjusting entry it offsets. Auditors look for this link when testing journal entries.
That last point matters. Auditors are expected to understand the controls over “initiating, authorizing, recording, and processing journal entries in the general ledger” and to test entries “recorded at the end of the period or as post-closing entries with little or no explanation.”1Public Company Accounting Oversight Board (PCAOB). Audit Focus: Journal Entries Clean cross-referencing makes the trail self-evident.
Example: Accrued Wages
Employees earn $4,500 in wages during the last few days of December, but payday falls on January 5. The full January 5 payroll is $10,000.
December 31 adjusting entry. Debit Wages Expense $4,500, credit Wages Payable $4,500. This recognizes the expense in the period it was earned and puts a liability on the balance sheet.
January 1 reversing entry. Debit Wages Payable $4,500, credit Wages Expense $4,500. The liability disappears, and Wages Expense now carries a $4,500 credit balance. That looks wrong in isolation, but it’s a built-in offset.
January 5 cash payment. Debit Wages Expense $10,000, credit Cash $10,000. Standard payroll entry, no special handling.
Wages Expense for January nets to $5,500, which is exactly the wages earned in January. December’s statements already captured the other $4,500. Both periods are correct, and the bookkeeper never had to look up last month’s accrual.
Example: Accrued Interest Revenue
A company earns $2,000 in interest on a corporate savings account during December, but the bank doesn’t deposit the payment until late January. Total January interest comes to $2,500.
December 31 adjusting entry. Debit Interest Receivable $2,000, credit Interest Revenue $2,000.
January 1 reversing entry. Debit Interest Revenue $2,000, credit Interest Receivable $2,000. The receivable is cleared; Interest Revenue temporarily carries a $2,000 debit balance.
Late January cash receipt. Debit Cash $2,500, credit Interest Revenue $2,500.
Interest Revenue for January nets to $500 in credit balance, which is the interest actually earned in January. December’s statements captured the other $2,000. The receivable is clean, and the deposit was recorded as an ordinary cash entry.
When the Actual Amount Differs From the Estimate
Accruals are estimates, and the final invoice rarely matches to the penny. Say a company accrues $20,000 in December for legal work in progress, and the invoice arrives in January for $21,200.
The reversing entry still uses the original $20,000. When the invoice posts, the bookkeeper records the full $21,200 as Legal Expense. The $20,000 credit from the reversal offsets most of that, leaving $1,200 in January’s expense. Strictly speaking, that $1,200 of legal work happened in December, but accountants don’t restate prior statements for minor changes in estimates. The current period absorbs the variance. If the gap were large enough to matter, that would be a different conversation, but most accrual-to-actual variances are small, and this treatment keeps the process efficient without sacrificing meaningful accuracy.
What Goes Wrong When You Skip One
If reversing entries are part of your standard workflow and someone forgets one, the accrual sits on the books and the full cash transaction gets recorded on top of it.
Take the wages example again. The $4,500 accrual stays in Wages Payable. On January 5, the bookkeeper (expecting the reversal to have happened) records the full $10,000 as Wages Expense. Now the $4,500 sits in both Wages Expense (from December’s adjusting entry, still there because the books were closed to retained earnings but Wages Payable was never cleared) and Wages Payable. January’s income statement shows $14,500 in wages expense instead of $5,500. The balance sheet shows a $4,500 liability that no longer exists. Net income is understated by $4,500.
The same logic runs in reverse for accrued revenue: a missed reversal leaves the receivable on the books after the cash arrives, overstating both assets and revenue. In a busy close with multiple accruals, these errors can be hard to trace back to a single missing reversal.
Companies that skip reversing entries by policy don’t face this risk, because their bookkeepers use compound entries by default: on payday, they debit Wages Payable for the accrued portion, debit Wages Expense for the new-period portion, and credit Cash for the total. That works fine when one person handles both the accrual and the payment. In larger organizations, where one team handles month-end and another handles daily transactions, reversing entries eliminate a handoff prone to miscommunication.
Automating Reversals in Accounting Software
Most modern accounting software can generate reversing entries automatically, which eliminates the risk of forgetting one. The concept is consistent across platforms: flag a journal entry for auto-reversal when you create it, and the software posts the mirror entry on the first day of the next period.
In QuickBooks Online, you reverse an existing journal entry from the account register by selecting the transaction and clicking “Reverse.” The software creates a new entry dated the first day of the following month with the original debits and credits swapped, and appends an “R” to the original entry number.2QuickBooks. How Do You Create an Auto Reversing Journal Entry?
Enterprise systems handle it more formally. In SAP S/4HANA, you set up a journal entry template designated for auto-reversal, specify a reversal reason and planned reversal date when posting, then schedule a batch job to execute the reversals. SAP can also recalculate local currency amounts using the exchange rate on the reversal date, which matters for multinational companies with foreign currency accruals.3SAP Help Portal. Posting Journal Entries with Auto-Reverse
Whatever the platform, automation only works if the original entry is flagged correctly at creation. Building that flag into your month-end checklist is the simplest way to keep any accrual from slipping through without its reversal.
One note on frequency. Textbooks often present reversing entries as an annual event, but many companies close monthly or quarterly and reverse on the same schedule. Public companies filing interim financial statements must reflect “all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented,”4eCFR. 17 CFR 210.10-01 – Interim Financial Statements which means accruals happen every quarter and reversals follow.