Reversing entries are one of the most practical tools in an accountant’s toolkit—yet they are often misunderstood or underused. A reversing entry is simply a journal entry recorded on the first day of a new accounting period that reverses a specific adjusting entry made at the end of the prior period. By undoing the accrual, reversing entries prevent double-counting when the actual transaction occurs in the new period. This article explains when to use reversing entries, how to record them, and walks through common scenarios including accrued expenses, accrued revenues, and prepaid items.
Why Use Reversing Entries?
Imagine the following scenario: On December 31, your company accrues $5,000 in wages for work performed in December but not paid until January 5 (the next pay date). You record an adjusting entry debiting Wages Expense and crediting Wages Payable. When January 5 arrives and you process a $12,000 payroll, you need to ensure that only the January portion ($7,000) hits expense—not the full $12,000, because $5,000 of it was already recognized in December.
Without a reversing entry, the accounting clerk on January 5 must recall the December accrual, consult the prior month’s workpapers, and manually split the $12,000 between the Wages Payable account and Wages Expense. This is error-prone and time-consuming.
With a reversing entry on January 1, the $5,000 accrual is automatically undone—Wages Payable is debited and Wages Expense is credited. Now, when the clerk processes the $12,000 payroll on January 5, they simply debit Wages Expense for the full $12,000 and credit Cash. The net effect in Wages Expense is exactly $7,000 ($12,000 debit less $5,000 reversal credit), which is the correct January expense.
For a refresher on period-end adjustments, see our guide on how to prepare adjusting entries.
Which Adjusting Entries Should Be Reversed?
Not all adjusting entries are candidates for reversal. The general rule: reverse accruals (where the expense or revenue is recognized before cash changes hands), but do not reverse deferrals (prepaids or unearned revenue) unless the company uses a specific method.
Entries That SHOULD Be Reversed
- Accrued expenses: Wages payable, interest payable, utilities payable, and any other expense accrued at period-end where the actual bill or payment follows in the new period.
- Accrued revenues: Interest receivable, rent receivable, or any revenue earned but not yet billed at period-end.
Entries That Are Typically NOT Reversed
- Depreciation: Depreciation is a systematic allocation, not an accrual. It does not need reversal.
- Prepaid expenses (asset method): If the company records prepaid insurance as an asset and amortizes it monthly, no reversal is needed.
- Unearned revenue (liability method): If the company records cash received in advance as a liability and recognizes revenue over time, no reversal is needed.
- Bad debt expense / allowance for doubtful accounts: These are estimates, not accruals waiting for a specific future transaction.
- Inventory adjustments / COGS: These reflect physical counts and valuation adjustments, not timing differences.
Reversing Entry for Accrued Wages
This is the most common reversal scenario. Let’s walk through a complete example.
Scenario: TechNova Inc.’s biweekly payroll period ends on Friday, January 8, 2027 (total payroll: $24,000). The company’s fiscal year ended on December 31, 2026. Employees worked 3 days in December (Dec 29–31) and 7 days in January (Jan 4–8). Daily payroll is $2,400 (10 business days = $24,000).
Step 1: Year-End Adjusting Entry (December 31, 2026)
| Account | Debit | Credit | |
| Wages Expense | $7,200 | ||
| Wages Payable | $7,200 | ||
| To accrue 3 days of wages earned in December ($2,400 × 3). | |||
Step 2: Reversing Entry (January 1, 2027)
| Account | Debit | Credit | |
| Wages Payable | $7,200 | ||
| Wages Expense | $7,200 | ||
| To reverse the December 31 accrual. | |||
After this reversal, Wages Payable returns to $0 and Wages Expense shows a $7,200 credit balance (negative).
Step 3: Actual Payroll Entry (January 8, 2027)
| Account | Debit | Credit | |
| Wages Expense | $24,000 | ||
| Cash | $24,000 | ||
| To record biweekly payroll payment. | |||
Net effect in January: Wages Expense = $24,000 (debit) − $7,200 (reversal credit) = $16,800, which correctly represents 7 days of January wages ($2,400 × 7). The $7,200 was properly recognized in December.
For more on payroll accounting, see our complete guide to journal entries for payroll.
Reversing Entry for Accrued Interest
Accrued interest on notes payable or bonds is another classic reversal candidate.
Scenario: On November 1, 2026, Atlas Corp. issued a $100,000, 6% note payable. Interest is payable semi-annually on April 30 and October 31. The year-end is December 31.
Step 1: Year-End Accrual (December 31, 2026)
Two months of interest accrued (November and December): $100,000 × 6% × 2/12 = $1,000.
| Account | Debit | Credit | |
| Interest Expense | $1,000 | ||
| Interest Payable | $1,000 | ||
| To accrue 2 months of interest on note payable. | |||
Step 2: Reversing Entry (January 1, 2027)
| Account | Debit | Credit | |
| Interest Payable | $1,000 | ||
| Interest Expense | $1,000 | ||
| To reverse the December 31 interest accrual. | |||
Step 3: Semi-Annual Payment (April 30, 2027)
Six months of interest: $100,000 × 6% × 6/12 = $3,000.
| Account | Debit | Credit | |
| Interest Expense | $3,000 | ||
| Cash | $3,000 | ||
| To record semi-annual interest payment. | |||
Net effect: January–April Interest Expense = $3,000 (debit) − $1,000 (reversal credit) = $2,000, representing 4 months of 2027 interest. The $1,000 for November–December 2026 was properly recognized in the prior year.
Reversing Entries for Accrued Revenue
The same logic applies when revenue is accrued but not yet billed.
Scenario: ConsultCo completed a $15,000 project in December 2026 but did not invoice the client until January 15, 2027.
Step 1: Year-End Accrual (December 31, 2026)
| Account | Debit | Credit | |
| Accounts Receivable | $15,000 | ||
| Service Revenue | $15,000 | ||
| To accrue unbilled revenue for work completed in December. | |||
Step 2: Reversing Entry (January 1, 2027)
| Account | Debit | Credit | |
| Service Revenue | $15,000 | ||
| Accounts Receivable | $15,000 | ||
| To reverse the December 31 revenue accrual. | |||
Step 3: Invoice Issued (January 15, 2027)
| Account | Debit | Credit | |
| Accounts Receivable | $15,000 | ||
| Service Revenue | $15,000 | ||
| To record invoice for December project. | |||
Net effect: Service Revenue in January: $15,000 (invoice credit) − $15,000 (reversal debit) = $0. Revenue was fully recognized in December, and January sees no double-counting.
Common Mistakes and Pitfalls
- Forgetting to reverse: The most common error is recording the year-end adjusting entry but forgetting to reverse it on day one of the new period. This leads to overstated liabilities or receivables and double-counted expenses or revenue when the actual transaction hits.
- Reversing non-accrual entries: Depreciation, amortization of prepaids, and bad debt provisions should not be reversed. Doing so will misstate asset and expense accounts.
- Reversing at the wrong date: The reversal must be dated the first day of the new period. Reversing on the actual transaction date defeats the purpose—it creates the same timing problem the reversal was meant to solve.
- Double-reversing: Some accounting software automatically reverses certain entries. Check your system settings before manually posting a reversing entry.
Reversing Entries in Accounting Software
Modern accounting systems (QuickBooks, Xero, NetSuite, Sage Intacct) support automated reversing entries. Typically, when recording a period-end journal entry, you can flag it as “reversing” and the system will automatically post the mirror-image entry on the first day of the following period.
In QuickBooks Online, for example, when creating a journal entry, check the “Reverse” checkbox and select the reversal date (usually the first day of the next month). The system handles the rest, eliminating the risk of forgetting to reverse manually.
Key Takeaways
- Reversing entries are optional under GAAP but highly recommended for efficiency and error reduction.
- Reverse accruals (accrued expenses and accrued revenues), not deferrals or allocations.
- The reversal is dated the first day of the new accounting period and is the exact mirror image of the prior period’s adjusting entry.
- Reversals allow the actual transaction to be recorded normally without manually splitting amounts between expense/revenue and payable/receivable accounts.
- Most accounting software supports automated reversing entries—use this feature to avoid forgetting.
Reversing entries are a simple but powerful tool that keeps the books clean and reduces manual work during the busiest time of the month—closing. For a complete guide to end-of-period procedures, see our article on journal entries for accrued expenses, and for broader closing workflows, visit our guide on how to prepare adjusting entries.
