Reversing Entries Explained With 2 Accrual Examples

Reversing entries are optional journal entries that flip the debit and credit of a selected adjusting entry, usually an accrual, on the first day of the next accounting period. They let you record the next payroll or invoice the usual way without double counting, so a January paycheck can go fully to Wages Expense while December keeps its labor cost.

Why Do Accountants Use Reversing Entries?

Reversing entries exist to make the next routine entry simple. Without a reversal, whoever records the January payroll or the next invoice has to remember the old accrual and split the entry between the payable (or receivable) and the expense (or revenue). With a reversal, they record it the usual way, every time.

That matters most when a company has many accruals, or when different people handle the year-end close and the day-to-day bookkeeping. A reversal also lowers the risk of double counting, which happens when the same cost or revenue lands in two periods. The trade-off is one more entry to post, and a forgotten reversal causes the very double count it was meant to prevent.

When Should You Use A Reversing Entry For An Accrual?

An accrual records an expense already incurred or revenue already earned before the ordinary payroll or billing entry captures it. At year-end, identify the work completed through the reporting date. An unpaid employee shift creates a wage expense and a liability. A completed job can create service revenue and a receivable once the right to payment is unconditional, meaning only the passage of time stands between the company and the cash (ASC 606-10-45-4). The accrual adjusting entries lesson explains how to measure the original amounts.

Three dates matter. Date the adjustment in the period when the work occurred. Date the optional reversal on the first day of the next period for exactly the amount accrued. Then record the actual payroll or invoice on its normal date. If the company skips the reversal, it must account for the existing payable or receivable when recording that later transaction.

In practice, many accounting departments pair an accrual with a scheduled reversal. Cornell University’s finance office, for example, allows year-end accruals entered through an Auxiliary Voucher (AV) to reverse automatically on a selected date in the next fiscal year. Accruals entered through its Year End Distribution of Income and Expense (YEDI) process require a separate reversing entry. See Cornell’s year-end revenue and expense examples.

Which Adjustments Should You Reverse, And Which Should You Leave Alone?

Ask one question: will a routine payroll, billing, or cash entry later record this same amount again? If yes, a reversal can help. If no, leave the adjustment alone.

• Accrued expenses, such as unpaid wages or interest. Usually reversed, because the next payment would otherwise be recorded entirely as expense.
• Accrued revenues, such as work done but not yet billed. Usually reversed, because the next invoice would otherwise record the full amount as revenue.
• Deferrals first recorded in an income statement account, such as supplies debited straight to Supplies Expense or customer cash credited straight to Service Revenue. These can be reversed.
• Deferrals first recorded in a balance sheet account, such as Prepaid Insurance or Unearned Revenue. Not reversed, because no later entry repeats the amount.
• Depreciation and bad debt estimates. Not reversed. No future cash entry depends on them, so there is nothing to double count.

Professor Farhat explains why depreciation and bad debt adjustments stay put at 2:01 in the video above.

How Do Reversing Entries Work For Accrued Wages?

Hypothetical example. Alder Sign Studio closes its books on December 31. Installers have earned $960 since the last payroll. Their January 8 check is $2,640, including the $960 already earned and $1,680 for January work. Ignore withholding and payroll taxes so the entries show only the timing of the wages.

In both columns, the December income statement includes the $960 and the December 31 balance sheet includes the liability. After year-end closing, Wages Expense begins January at zero. With a reversal, the January 1 credit gives the account a temporary $960 credit balance. When payroll debits $2,640, the net January expense is $1,680. The company paid $2,640 under either method.

Debiting Wages Payable on January 1 can seem odd while employees are still waiting for their money. Look at the credit side. A payment credits Cash. This entry credits Wages Expense. The company still owes the employees and must pay them on January 8.

Between January 1 and January 8, the unadjusted ledger shows no Wages Payable and a $960 credit balance in Wages Expense, even though Alder still owes the employees. These temporary balances result from the reversal; the obligation has not been settled. Before issuing financial statements during that interval, record the adjustments needed to recognize all wages earned but unpaid at the reporting date, including the $960 carried over from December and any additional January wages. The later payroll entry must account for any accrual still recorded to avoid double counting.

How Do Reversing Entries Work For Accrued Revenue?

Hypothetical example. Vale Captioning charges $300 per completed recording and sends one invoice per week. By December 31 it has delivered two recordings and has an unconditional right to $600. It completes three more recordings during the first week of January. That week’s invoice, its first in January, covers all five recordings, or $1,500.

1. December 31. Debit Accounts Receivable $600 and credit Service Revenue $600 for the two completed recordings.
2. January 1. To reverse the accrual, debit Service Revenue $600 and credit Accounts Receivable $600.
3. Invoice date. Debit Accounts Receivable $1,500 and credit Service Revenue $1,500 using the usual billing entry.

January revenue is $900, equal to three new recordings at $300 each. The invoice leaves a $1,500 receivable. When the customer pays in full, debit Cash and credit Accounts Receivable for $1,500. Collection settles the receivable.

Without the reversal, the existing $600 receivable already represents part of the invoice. The company would add only $900 to the general ledger receivable and revenue when it bills the five recordings, while showing the customer the full $1,500 invoice.

How Do You Catch A Double Count?

Start with the economic activity and work backward. Alder’s employees earned $1,680 in January. If the ledger shows a January expense of $2,640 and the $960 December payable is still outstanding after payday, payroll charged the whole check to expense without first reversing the accrual. If the company did reverse and payroll still split the check between Wages Payable and Wages Expense, January expense would show only $720 ($1,680 minus the $960 reversal credit), and Wages Payable would carry an unusual $960 debit balance.

Exam tip. Many textbook and exam questions tell you whether a reversing entry was made, then ask how to record payday. With a reversal, the whole payment goes to expense. Without one, split it between the payable and the expense. Read that detail first, then journalize. You can practice more questions like this in Professor Farhat’s Intermediate Accounting course.

Before applying this logic to a prepayment or customer advance, check where the original cash entry was recorded: in a balance sheet account (such as Supplies or Unearned Revenue) or in an income statement account (such as Supplies Expense or Service Revenue). The section on which adjustments to reverse, earlier in this guide, explains when a first-day entry makes sense for a deferral.

Key Takeaways

• Reversing entries are optional. U.S. GAAP does not require them.
• They are dated the first day of the new period and flip a selected adjusting entry.
• Common candidates for optional reversal include accrued expenses, accrued revenues, and deferrals first recorded in an income statement account.
• Don’t reverse depreciation, bad debt estimates, or deferrals first recorded in a balance sheet account.
• With or without a reversal, Alder’s December expense is $960 and its January expense is $1,680. Only the bookkeeping path differs.

Practice questions

1. What amount belongs in the reversal?

A business accrues $450 of wages on June 30 and expects a $1,900 payday in July. Answer. On July 1, debit Wages Payable $450 and credit Wages Expense $450. The amount comes from the June adjustment. The payroll total belongs to the later payment entry.

2. How much revenue did July earn?

A firm reverses $720 of June service revenue and records a $2,100 invoice in July for June and July work. Answer. July earned $1,380. The $2,100 credit to Service Revenue is offset by the $720 debit from the reversal.

3. How should payroll record a payment if the accrual was left in place?

A $1,750 payment includes $500 accrued at year-end. Answer. Debit Wages Payable $500, debit Wages Expense $1,250 and credit Cash $1,750. This clears the old liability and charges the new period for its share.

Frequently asked questions

Are reversing entries required?

No. U.S. GAAP does not require reversing entries. They are a bookkeeping choice, and either approach produces the same correct balances once the later payroll or invoice is recorded. Just make sure the later entry matches the approach you used, and follow any method an exam question or exercise specifies.

How does a reversal differ from a closing entry?

Closing transfers the period’s temporary account balances into equity, directly or through Income Summary. A reversal offsets one selected adjustment in the next period. This is why Alder reverses only the $960 accrual, even if its total December wages were much larger.

What if a payroll or invoice is still outstanding at the next reporting date?

Review the unpaid obligation or unbilled work at that date. Record any adjustment needed to report the amount still owed or earned. An automatic reversal does not establish that the underlying transaction has been settled.

Which Adjusting Entries Should Not Be Reversed?

Depreciation, bad debt estimates, and deferrals first recorded in a balance sheet account, such as Prepaid Insurance or Unearned Revenue. No routine cash entry follows these adjustments, so there is nothing to double count.

Do Reversing Entries Change The Financial Statements?

No. The reversal is dated in the new period, so the prior period’s statements still include the accrual. Once the related payroll or invoice is recorded, the new period’s balances match what you would get without a reversal.

Can Accounting Software Reverse Entries Automatically?

Many accounting systems let you mark an accrual to reverse automatically on a date you choose, usually the first day of the next period. At Cornell University, year-end accruals entered through an Auxiliary Voucher (AV) can reverse automatically on a selected date in the new fiscal year. Its Year End Distribution of Income and Expense (YEDI) process requires a separate reversing entry.

About the author

Mansour Farhat, CPA, CIA, DBA, is the professor behind Farhat Lectures, where he teaches financial accounting, intermediate accounting, and CPA exam prep through video lessons and practice exercises.