Reversing EntriesExplained with Advantages & Disadvantages
Reversing entries, also known as reversing journal entries, are journal entries made at the beginning of an accounting period that reverse or cancel adjusting entries that were made in the previous accounting period.
These entries are optional and can simplify a business’s bookkeeping.
Explaining Reversing Entries
Reversing entries refer to journal entries that are made to reverse a journal entry that was made in a previous accounting period or to offset accrual entries before beginning new ones.
These entries can make bookkeeping easier because, without the reversing entry, the accountant would need to make sure she only recorded the current portion of an expense because part of it was recorded in the previous accounting period. Otherwise, the amount may be doubled.
Reversing entries are different than adjusting entries.
Reversing entries are done at the start of a new accounting cycle, whereas adjusting entries are performed at the end of an accounting cycle.
If you need to correct a previous journal entry, such as if you made a mistake when posting a purchase order, a reversing entry can be used to correct this.
Reversing journal entries can also be used to make it easier to record some transactions in the future because it removes the need to make some compound entries later.
Reversing Entry Examples
Here are two examples of reversing entries.
Example One
Suppose an employer made an adjusting entry in July for $700 in unpaid wages.
The adjustment would consist of a $150 debit to the wages expense account and a $700 credit to the wages payable account.
Then, if an employer does not want to make a reversing entry, it would be necessary to keep in mind that part of the payroll for the month of August was already recorded in both the wages expense and wages payable accounts.
It would be easier to make a reversing entry at the start of the August accounting period.
This would be used to record a $700 decrease in wages payable and a $700 decrease in wages expense.
If this reversing entry is made, the payroll can be recorded as a debit to wages expense and a credit to cash, no matter the amount.
| Date | Account and Explanation | Debit | Credit |
| July 30 | Wages Expense | $700 | |
| Wages Payable | $700 | ||
| Accrued wages for August | |||
| Date | Account | Debit | Credit |
| August 1 | Wages Payable | $700 | |
| Wages Expense | $700 | ||
| Reversal of Wages Accrual | |||
Example Two
Suppose you order some supplies at the end of April, thus accruing an expense of $500.
But, your business does not receive the invoice for the supplies until May.
You should record a reversing entry at the start of May, as you expect to receive the invoice during the month.
The reversing entry will consist of debiting accrued expenses payable $500 and crediting supplies expenses for $500.
After the invoice is received, you will record the transaction.
The $500 supplies expense would be debited, and cash would be credited, thus clearing the accrual entry.
| Date | Accounts | Debit | Credit |
| May 1 | Accrued Expenses Payable | $500 | |
| Supplies Expense | $500 | ||
| Reversing entry for purchased supplies | |||
| Date | Accounts | Debit | Credit |
| May 7 | Supplies Expense | $500 | |
| Cash | $500 | ||
| Entry for purchase of supplies. | |||
You will generally record any reversing entries at the beginning of the month.
You may occasionally have an accrual that you choose to record later.
If this happens, it is important to set a reminder concerning the matter so as to ensure you do remember to reverse the entry.
Otherwise, you could forget to record the entry, which could cause errors in your ledger.
Reversing Entry Types
There are two different kinds of reversing entries.
These are manual and automatic.
Manual reversing entries are those journal entries you make yourself to make sure they are properly recorded.
Automatic reversing entries are made by accounting software.
This includes journal entries made at the end of the month as well as the reverse entries at the beginning of the month.
Final Thoughts
Reversing entries are a way of reversing journal entries you made in the previous month.
They are frequently used in payroll.
However, they can be useful for correcting errors as well, such as transposition errors.
Reversing entries can be done manually or entered automatically by accounting software.
FundsNet requires Contributors, Writers and Authors to use Primary Sources to source and cite their work. These Sources include White Papers, Government Information & Data, Original Reporting and Interviews from Industry Experts. Reputable Publishers are also sourced and cited where appropriate. Learn more about the standards we follow in producing Accurate, Unbiased and Researched Content in our editorial policy.
University of California, Santa Barbara "Completing the Accounting Cycle" Chapter 4. November 2, 2022