Reversing Entries in Accounting Definition, Examples

The journal entry neutralizes the Sept. 30 journal entry, making it as if it never happened, and Timothy’s salaries payable account goes back to $0. That’s why it’s an accounting faux pas to delete transactions in your accounting software. Business owners should familiarize themselves with reversing entries, which can clear previously recorded transactions without erasing any financial data.

The next example revisits the same facts using reversing entries. 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. But wait, didn’t we zero out the wages expense account in last year’sclosing entries? This reversing entry actually puts a negative balance in the expense.

Reversing Entry Example

However, reverse entries add to the workload of the individual performing the entries. Accounting software automatically numbers all journal entries so that auditors can easily track deletions. Auditors will question accounting records with missing journal entries since they could be a sign of financial malfeasance. Without a reversing entry, you’d have a $10,000 expense on your books until the bill comes in. You’d then have to do some accounting and arithmetic gymnastics to record the $9,500 invoice accurately. It might be helpful to look at the accounting for both situations to see how difficult bookkeeping can be without recording the reversing entries.

For example, the original journal entry debits Accounts Receivable $100, credits a revenue account $100, and has an exchange rate of 1.5. The reversing entry credits Accounts Receivable $100, debits the revenue account $100, and has an exchange rate of 1.5 regardless of the current exchange rate. You have been exposed to the concepts of recording and journalizing transactions previously, but this explains the rest of the accounting process.

Using Reversing Entries

For the current period, he would just have to record the expenses and revenue as they come in and not worry about the accrued and prepayments of the last period. 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. While you record reversing entries at the beginning of the month, it is possible to have an accrual that you do not immediately reverse. Make note of this each month until you do reverse the entry, as this can prevent entries mistakenly going unreversed.

• When an adjusting entry is made for an expense at the end of the accounting period, it is necessary to keep track of this expense so that the transaction will be allocated properly between the two periods.
• If your business used reversing entries, you’d have accurate financial statements and one less pain point with your spouse.
• Reversing entries are the mirror images of an accrual entry, usually recorded on the first day of the succeeding month.
• On January 7th, Paul pays his employee $500 for the two week pay period.
• However, we could also avoid all this work by simply having payroll post the check as run on the 10th to Wages Payable and the check run on the 25th to Wage Expense.
• This adjusting entry assures that the retailer’s income statement for the period ended December 31 will report the $18,000 expense and its balance sheet as of December 31 will report the $18,000 liability.

https://quick-bookkeeping.net/ entries, or reversing journal entries, are journal entries made at the beginning of an accounting period to reverse or cancel out adjusting journal entries made at the end of the previous accounting period. A company has earned $15,000 as it has delivered its service but has not billed its client yet. The adjusting entry made for it in the previous year was debit accrued revenue and credit revenue account. The reversing entry at the beginning of this year would be to debit revenue account and credit accounts receivable account.