How to Use Reversing Entries in Your Business Accounting

You accrue $10,000 of revenue in January, because the company has earned the revenue but has not yet billed it to the customer. You expect to invoice the customer in February, so you create a reversing entry in the beginning of February to reverse the original $10,000 revenue accrual.

• A reversing entry is an accounting entry that is made at the beginning of an accounting period to reverse the effects of a previous adjusting entry.
• For example, the original journal entry debits Accounts Receivable $100, credits a revenue account $100, and has an exchange rate of 1.5.
• It significantly reduces the chances of making an error of double counting certain expenses or revenues.
• Making the reversing entry at the beginning of the period just allows the accountant to forget about the adjusting journal entries made in the prior year and go on accounting for the current year like normal.
• For October, the rent period was 10 days or 1/3 of the entire month and the expense was $1,000.

It’s best practice not to delete journal entries, even if there’s a mistake. The best way to correct your accounting records is to record a reversing entry and create a fresh and correct journal entry. 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. Between May 1 when the reversing entry is made and May 10 when the payroll entry is recorded, the company’s total liabilities and total expenses are understated. This temporary inaccuracy in the books is acceptable only because financial statements are not prepared during this period. Suppose Mr. Green makes an adjusting entry at the end of April to account for $80 in unpaid wages.

Explaining Reversing Entries

Reversing entries are optional, but I’d highly recommend them. Here’s why you should implement reversing entries in your small business accounting system. Manual reversing entries are those journal entries you make yourself to make sure they are properly recorded. It would be easier to make a reversing entry at the start of the August accounting period.

Using reversing entries as part of the accounting cycle can help. As the final step taken during any given accounting period, they make it easier to avoid costly errors and make sure you’ve got an accurate snapshot of your accounts. To account for salaries partially accounted for in the current period and the prior period. While this is seemingly easy, remember we have not considered other complexities such as overtime, payroll taxes and tax withholdings. Perhaps the company does not have an experienced accountant on staff that would know how to make the accruals at the end of the period. Chances are the payroll system will only report the weekly payroll total without apportioning the salary expense between two periods as GAAP requires.

Move your business forward with reversing entries

It requires some time and a little effort for the concepts to sink in. When payday rolls around on Oct. 5, Timothy records a payroll journal entry for the entire amount he owes his employees, which is $2,500 ($250 per workday x 2 employees x 5 working days). He has two employees who are paid every Monday for the previous week’s work. An accountant in another life, Timothy uses the accrual basis of accounting.

Reversing entries are the reversals of accrued journal entries in order to back out the accrual and make space for the actual, meaning the real expense/revenue entry. Reversing entries simplify the bookkeeping process and minimize errors that might come from overstating expenses and/or revenues if accruals are kept in and the actual entry is entered as normal. In theory, a reversing entry can be any journal entry that reverses a previous one. In practice, however, the term reversing entry is used for accrual reversals and the term correcting entry for anything that is meant to correct an error in a previous journal entry.

They reduce the likelihood of accounting errors

Reversing entries related to period closing always are paired with entries from the past. You can enter a journal entry in January and reverse it in February to avoid duplication in February. You don’t normally go back to January to reverse an entry done in February. If the bookkeeper does not record these reversal entries, then he would have to remember which portion of the current expenses, for example, has already been paid out in the previous period. Therefore, there is a high chance of double-counting certain revenues and expenses. The practice of making reversal entries at the beginning of the accounting cycle will ensure that this error of double counting is avoided.

• As we stated before, getting rid of past entries, especially when those entries are expenses, is a key part of accounting entries.
• Both types of reversing entries work the same as far as debiting and crediting your general ledger.
• For more information about shared records, see Assigning Subsidiaries to a Vendor and Assigning Subsidiaries to a Customer.
• Tie a ribbon around your finger or put a note on your calendar to remind yourself to record reversing entries.

Now, if you think about this example further, on October 31st the company will once again record an adjusting entry for $2,000. So, in total October financial statements will have $3,000 (i.e., $1,000 + $2,000) of rent expense which is what it should be.

https://bookkeeping-reviews.com/ entries ensure they’ll be processed properly and removed from the list of assets and liabilities for the current period. Businesses of all sizes can sometimes find it challenging to manage proper attribution and adjustment of assets and liabilities for a given accounting period. You have been exposed to the concepts of recording and journalizing transactions previously, but this explains the rest of the accounting process. The accounting cycle is the repetitive set of steps that must occur in every business every period in order to meet reporting requirements.

Discover our comparison of the best accounting software for nonprofits, their highlights, strengths, and weaknesses. While you might have been well-intentioned in deleting incorrect journal entries, it’s better to lay your cards out to auditors by showing them your erroneous and corrective journal entries. You’re waiting on a bill from your independent contractor that you expect to be around $10,000, but you haven’t gotten it in the mail yet. Rather than waiting for the bill, you record a $10,000 expense at the end of the month. The information featured in this article is based on our best estimates of pricing, package details, contract stipulations, and service available at the time of writing.

A reversing entry is a journal entry made in an accounting period, which reverses selected entries made in the immediately preceding period. The reversing entry typically occurs at the beginning of an accounting period. It is commonly used in situations when either revenue or expenses were accrued in the preceding period, and the accountant does not want the accruals to remain in the accounting system for another period. Journal entries are used to change accounting information in financial systems.