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Reversing Entries: A Tutorial of All You Need to Know

reversing entries accounting

NeatNiks’s works with independent contractors instead of employees, but just for this example, let’s pretend that it pays employee wages. Depreciation expense and accumulated depreciation will need to be posted in order to properly expense the useful life of any fixed asset. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. In this case, the $2,300 in wages that is the beginning balance of Wage Expense are October wages and already include the $1,200 accrual. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers.

So, reversing entries are recorded at the start of the next period and these newly created accounts are reversed to cancel out the adjusting entries effect. Accuracy is crucial in bookkeeping, and errors can lead to financial misstatements. For example, if a vendor’s invoice is recorded incorrectly, it can result in incorrect accounts payable balances. Reversing journal entries can help correct these errors and ensure that the financial statements are accurate.


Once you do, you’ll be able to see why we make reversing entries for some accruals. 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. If the accountant did not make a reversing entry at the beginning of the year, the accountant will have this entry upon payment of the rent. As you can see from the T-Accounts above, both accounting method result in the same balances. The left set of T-Accounts are the accounting entries made with the reversing entry and the right T-Accounts are the entries made without the reversing entry. After the January 1 reversing entry, the account Accrued Expenses Payable will have a zero balance, and the account Temp Service Expense will have an unusual credit balance of $18,000.

reversing entries accounting

Automatic reversing entries are a type of journal entry that automatically reverses the original entry on a specified date. This feature is useful for correcting errors, adjusting entries, or for recording accruals and deferrals. The reversing entry ensures that the original entry is reversed, and the correct entry is recorded in the general ledger. Now let’s look at how we would handle this situation using reversing entries. When you prepare the original accrued salary journal entry described above, you also prepare a reversing entry at the same time.

What Are Reversing Entries?

If the reversing entry was used, salary expense for the first three days of January is now correct ($3,000), and the accrued payroll tax liability has now been removed from the books. This is especially important for smaller companies where there does not seem to be enough time in the day for everyone to accomplish what they need to accomplish. It also reduces the need for higher level accountants to close the books every month. The reversing entry reflects the matching principle, which is based on the time period concept. We recognized the expense in October by making an adjusting journal entry.

  • Tim will have to accrue that expense, since his employees will not be paid for those two days until April.
  • After almost a decade of experience in public accounting, he created to help people learn accounting & finance, pass the CPA exam, and start their career.
  • They ensure that adjusting entries are properly recorded and that the financial statements accurately reflect the financial position of the company.
  • This allows the actual entry for the expense or revenue to be recorded normally, without complicating the journal entry by accounting for the accrued amount.