Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.

• They reduce the likelihood of duplicating revenues and expenses and committing other errors.
• Reversal entries will significantly make life of a bookkeeper easier since he won’t have to remember which expenses and revenues were accrued and prepaid.
• However, the first journal entry of 20X4 simply reverses the adjusting entry.
• These entries are optional depending on whether or not there are adjusting journal entries that need to be reversed.
• If the reversing entry is made, the May 10 payroll payment can be recorded with a simple entry that increases (debits) wages expense for $200 and decreases (credits) cash for $200.
• Between May 1 when the reversing entry is made and May 10 when the payroll entry is recorded, the company’s total liabilities and total expenses are understated.

At the beginning of the month B that expense is reversed via a reversing entry. When the full amount of the interest is paid in month B, each month’s books will show the proper allocation of the interest expense. The purpose of recording reversing entries is clear out the prepaid and accrual entries from the prior period, so that transactions in the current period can be recorded normally. Since GAAP and the accrual basis of accounting requires that revenues and expenses be matched in the periods in which they occur, accrual journal entries are recorded at the end of each period. At the beginning of each accounting period, some accountants use reversing entries to cancel out the adjusting entries that were made to accrue revenues and expenses at the end of the previous accounting period.

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The Sept. 30 accrual reflected three days of wages, but now he owes the employees for working five days. Since he reversed the accrued wages, the payroll journal entry is for the entire amount paid to employees. If you were to forget to reverse the expense in the second example, the accounting records would show a $20,000 expense in January and another $20,000 expense in February, where the February amount is erroneous. The key indicator of this problem will be an accrued liability of $20,000 that the accounting staff should locate if it is periodically examining the contents of the company’s liability accounts.

• The interest payable account carried a credit balance of $50 over to the new period, and this balance became zero when the October 1 reversing entry was posted.
• The reversing entry erases the prior year’s accrual and the bookkeeper doesn’t have to worry about it.
• Reversing entries are a type of journal entry, which is how businesses record transactions.
• Imagine how easy it would be to forget that you recorded the $10,000 last month.
• Then, when the bill comes in for $9,500, you record a new journal entry for $9,500 in consultant fees and accounts payable.

It’s best practice not to delete journal entries, even if there’s a mistake. The best way to correct your accounting records is to record a reversing entry and create a fresh and correct journal entry. Preparing reversing entries is an optional, intermediate step between recording revenue or expenses and having cash enter or leave reversing entries are optional your business. Many business owners implement reversing entries to reduce the likelihood of double-counting revenue and expenses. The key indicator of this problem will be an accrued account receivable of $10,000 that the accounting staff should eventually spot if it is regularly examining the contents of its asset accounts.

An example of reversing entries

The purpose of these entries is to reverse the adjusting entries that were made in the previous financial reporting period. It is commonly used for revenue and expense account which had accruals or prepayments in the preceding accounting cycle and the accountant prefers not to keep these in the accounting system. Journal entries are used to change accounting information in financial systems.

The accounting software will reverse this adjusting entry in the next accounting period so that the accountant does not have to remember to do this. Reversing entries are optional accounting journal entries that are made at the beginning of an accounting period, to cancel adjusting entries which were made at the end of the previous accounting period. Accrual-basis businesses, guided by the matching principle, prepare adjusting entries so that revenues and expenses are recognized in the proper period. On the first day of the next accounting period, they may prepare reversing entries that clear the adjusting entries.

Preparing Reversing Entries

It is extremely easy to forget to manually reverse an entry in the following period, so it is customary to designate the original journal entry as a reversing entry in the accounting software when it is created. The software then automatically creates the reversing entry in the following period. If Paul does not reverse last year’s accrual, he must keep track of the adjusting journal entry when it comes time to make his payments. Since half of the wages were expensed in December, Paul should only expense half of them in January. Reversing entries help prevent accountants and bookkeepers from double recording revenues or expenses.

Reversing entries are made because previous year accruals and prepayments will be paid off or used during the new year and no longer need to be recorded as liabilities and assets. These entries are optional depending on whether or not there are  adjusting journal entries that need to be reversed. The adjusting entry in 20X3 to record $2,000 of accrued salaries is the same. However, the first journal entry of 20X4 simply reverses the adjusting entry. On the following payday, January 15, 20X5, the entire payment of $5,000 is recorded as expense.

As you can see from the T-Accounts above, both accounting method result in the same balances. The left set of T-Accounts are the accounting entries made with the reversing entry and the right T-Accounts are the entries made without the reversing entry. One is when it comes to accrued payroll, where you would need to make a reverse entry the following month when wages are actually paid.