Reversing Journal Entries Explained: What They Are and When to Use Them
The optional step that keeps your accrual accounting clean, period after period.
At the beginning of a new accounting period, some businesses record reversing journal entries to simplify bookkeeping and prevent duplicate entries.
Although reversing entries are optional, they can make accounting much easier — especially when dealing with accrued expenses and accrued revenues.
If you've already learned about adjusting journal entries and closing entries, reversing entries are the next logical step in understanding the complete accounting cycle.
In this guide, you'll learn what reversing journal entries are, when they should be used, how they work, and when they should be avoided.
What Are Reversing Journal Entries?
Here's the short version:
A reversing journal entry is a journal entry made at the beginning of a new accounting period that reverses certain adjusting entries recorded at the end of the previous period.
In simple terms, it cancels out selected adjusting entries so that routine transactions can be recorded normally when cash is received or paid. If you're comfortable with how entries flow into the general ledger, reversing entries will feel like a natural extension of that process.
Reversing entries reduce the risk of recording the same income or expense twice.
Why Are Reversing Entries Used?
Without reversing entries, bookkeepers may need to remember which transactions were already accrued in the previous period.
Reversing entries help by:
- Simplifying bookkeeping
- Reducing manual adjustments
- Preventing duplicate expenses
- Preventing duplicate revenue
- Improving accuracy
- Saving time during month-end processing
- Making payroll and invoice recording easier
Are Reversing Entries Mandatory?
Short answer: no.
Reversing entries are optional. Many accounting software platforms automatically generate them for selected transactions, while others allow users to enable or disable them.
Whether you use reversing entries depends on your accounting policies and bookkeeping procedures.
Which Adjusting Entries Are Usually Reversed?
Reversing entries are most commonly used for:
- Accrued expenses
- Accrued revenue
They are generally not used for:
- Depreciation
- Prepaid expenses
- Deferred revenue
- Inventory adjustments
- Bad debt provisions
Example 1: Accrued Salaries
Assume employees earned $5,000 by December 31, but payroll will be processed on January 5.
| Year-End Adjusting Entry | |
|---|---|
| Debit — Salaries Expense | $5,000 |
| Credit — Salaries Payable | $5,000 |
| January 1 Reversing Entry | |
|---|---|
| Debit — Salaries Payable | $5,000 |
| Credit — Salaries Expense | $5,000 |
| January 5 Payroll | |
|---|---|
| Debit — Salaries Expense | $5,000 |
| Credit — Cash | $5,000 |
Because of the reversing entry, the payroll can be recorded normally without worrying about the prior accrual.
Example 2: Accrued Revenue
Suppose your business completed consulting work worth $2,000 on December 31 but issued the invoice in January.
| Year-End Adjustment | |
|---|---|
| Debit — Accounts Receivable | $2,000 |
| Credit — Consulting Revenue | $2,000 |
| January Reversing Entry | |
|---|---|
| Debit — Consulting Revenue | $2,000 |
| Credit — Accounts Receivable | $2,000 |
| Invoice Recorded | |
|---|---|
| Debit — Accounts Receivable | $2,000 |
| Credit — Consulting Revenue | $2,000 |
The final accounting result is correct, while the recording process remains straightforward.
When Should You Use Reversing Entries?
They are most useful when:
- Payroll spans two accounting periods
- Utility bills arrive after month-end
- Interest expenses are accrued
- Consulting fees are earned but invoiced later
- Routine accruals occur every month
Businesses with regular month-end accruals often benefit the most.
When Should You Avoid Reversing Entries?
Not every adjustment should be reversed.
Depreciation — Depreciation represents the systematic allocation of an asset's cost and should not be reversed.
Prepaid Expenses — Prepaid expenses are adjusted gradually over time and do not require reversal.
Deferred Revenue — Revenue recognition follows the completion of contractual obligations rather than being reversed automatically.
Inventory Adjustments — Inventory corrections should remain in the accounting records.
Benefits of Reversing Entries
Using reversing entries can:
- Reduce bookkeeping complexity
- Minimize duplicate entries
- Improve consistency
- Simplify payroll accounting
- Make invoice processing easier
- Reduce month-end corrections
- Support accurate financial reporting
They are particularly helpful in businesses with recurring accruals.
Potential Drawbacks
Reversing entries are not always necessary. Possible disadvantages include:
- Additional journal entries
- Confusion for inexperienced bookkeepers
- Incorrect reversal of non-reversible adjustments
- Overreliance on automation without review
Good documentation and training help avoid these issues.
Reversing Entries vs Adjusting Entries
| Adjusting Entries | Reversing Entries |
|---|---|
| Made at the end of the accounting period | Made at the beginning of the next period |
| Update account balances | Reverse selected adjustments |
| Required for accurate financial statements | Optional bookkeeping tool |
| Record accruals and deferrals | Simplify future transaction recording |
Both serve different purposes within the accounting cycle. For a full walkthrough of the first half of this process, see our guide to adjusting journal entries.
Reversing Entries vs Closing Entries
| Reversing Entries | Closing Entries |
|---|---|
| Optional | Required in the closing process (where applicable) |
| Reverse selected adjustments | Reset temporary accounts |
| Prepared at the start of a new period | Prepared at the end of a period |
| Simplify bookkeeping | Prepare books for the next reporting period |
Understanding these differences helps avoid confusion — if you haven't yet, it's worth reading our companion piece on closing entries to see how the two fit together across a full period-end cycle.
- Reversing depreciation
- Reversing prepaid expenses
- Forgetting to reverse accrued expenses
- Posting duplicate reversals
- Reversing incorrect amounts
- Recording reversals in the wrong accounting period
- Failing to document why an entry was reversed
Best Practices
To use reversing entries effectively:
- Create standard month-end procedures
- Clearly identify which adjusting entries should be reversed
- Review all reversing entries before posting
- Maintain supporting documentation
- Use accounting software automation where appropriate
- Train staff on reversing entry policies
Consistency is key. Solid internal documentation ties back to good overall general ledger hygiene and makes life easier when it's time to prepare for an audit.
Key Takeaways
- Reversing journal entries are made at the start of a new period to cancel out selected adjusting entries.
- They're optional, but useful for recurring accrued expenses and accrued revenue.
- They should generally not be used for depreciation, prepaid expenses, deferred revenue, or inventory adjustments.
- They reduce the risk of double-counting income or expenses.
- They fit between adjusting entries and the routine recording of everyday transactions in the accounting cycle.
Frequently Asked Questions
Are reversing journal entries required?
No. They are optional and primarily used to simplify bookkeeping for recurring accruals.
Do all adjusting entries need reversing?
No. Only certain adjusting entries, such as accrued expenses and accrued revenues, are commonly reversed.
Can accounting software create reversing entries automatically?
Yes. Many accounting systems allow users to automatically generate reversing entries for selected adjusting journal entries.
What happens if a reversing entry is forgotten?
If the related transaction is recorded normally without reversing the original adjustment, revenue or expenses may be recorded twice.
Should small businesses use reversing entries?
Small businesses with regular accruals or monthly financial reporting often benefit from reversing entries, but businesses with simple bookkeeping may not need them.
Final Thoughts
Reversing journal entries are a practical bookkeeping tool that simplifies the recording of recurring accruals in a new accounting period. While they are not required under accounting standards, they can reduce errors, streamline month-end processes, and make financial recordkeeping more efficient.
Understanding when to use — and when not to use — reversing entries is an important step toward mastering the accounting cycle.
About the Author
Ishara Vithana is a senior finance professional with over two decades of experience in accounting, bookkeeping, and small business finance. He is a Xero Certified Advisor and Partner, Dext Certified Expert, Fathom Advisor, and Tally Prime expert. Through Finance Made Simple, he helps small business owners and DIY bookkeepers understand accounting, bookkeeping, and business finance with practical, easy-to-follow guides. Connect with Ishara →
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