How to Use Reversing Entries in Your Business Accounting

How to Use Reversing Entries in Your Business Accounting

What are Reversing Entries

Having a rent income account with a debit balance may seem odd at first, considering that income accounts normally have credit balances, but this would make sense once you’ve made the entry to collect the rent. It should be noted that whichever method is used, the financial statements for each month will be the same. In each case at the end of month 2, the balance on the wages expense account is 2,500, and the balance on the wages payable liability account is nil. With automatic reversing entries, your accounting software will automatically make a journal entry at the end of the month and record a reverse entry at the start of the new month. Both types of reversing entries work the same as far as debiting and crediting your general ledger.

As a result, the account Temp Service Expense will begin January with a zero balance. Reversing entries work to clear out any accruals that you do not want reflected in the new accounting period. Lets assume now that the business makes reversing entries at the start of month 2.

Understanding Business and Its Purpose

This adjusting entry records months A’s portion of the interest expense with a journal entry that debits interest expense and credits interest payable. At the beginning of the month B that expense is reversed via a reversing entry. When the full amount of the interest is paid in month B, each month’s books will show the proper allocation of the interest expense. The purpose of recording reversing entries is clear out the prepaid and accrual entries from the prior period, so that transactions in the current period can be recorded normally. Since GAAP and the accrual basis of accounting requires that revenues and expenses be matched in the periods in which they occur, accrual journal entries are recorded at the end of each period.

What are Reversing Entries

Suppose Mr. Green makes an adjusting entry at the end of April to account for $80 in unpaid wages. This adjustment involves an $80 debit to the wages expense account and an $80 credit to the wages payable account. Paul can reverse this wages accrual entry by debiting the wages payable account and crediting the wages expense account. So, these are some tips you shouldc follow while making reversing entries. After posting the entry, your rent income account should now show a credit balance of $2,000 which is the net effect of debiting it for $1,000 and then crediting it for $3,000. You have recognized a total of $3,000 for this transaction, with $1,000 recorded on 2022 while the remaining $2,000 being recorded in 2023 upon collection.

Use Reversing Entries

If accountants do not understand the nature of transactions, it is highly likely to select the wrong accounts and it will impact financial statements. All expenses must include in the accounting period although they are not yet paid. For example, the accrued expense on payroll, construction contract, and other services.

Reversing entries are a type of journal entry, which is how businesses record transactions. Preparing reversing entries is an optional, intermediate step between recording revenue or expenses and having cash enter or leave your business. Many business owners implement reversing entries to reduce the likelihood of double-counting revenue and expenses. Reversing entries help prevent accountants and bookkeepers from double recording revenues or expenses. Reversing entries are most often used with accrual-type adjusting entries.


Using a reversing entry would simplify the work of the data entry personnel who doesn’t need to consider the impact of any previously-posted adjusting entry. Reversing entries can help you manage your accounting records more efficiently. One downside is how easy it is to forget about reversing entries at the beginning of the month.

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  • Reversing entries can help you manage your accounting records more efficiently.
  • Another option is to allow your accounting software to automatically do the preparation of reversing entries for you at the beginning of a new accounting period.
  • All expenses must include in the accounting period although they are not yet paid.
  • To avoid the need for a compound entry, Mr. Green may choose to reverse the April 30 adjustment for accrued wages when the May accounting period begins.

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