Definition
A reversing entry is the mirror image of an adjusting entry, dated the first day of the next period. It removes the accrual so that when the cash payment or invoice arrives, the bookkeeper can record it in full to expense without checking whether part of it was already accrued. Reversing is optional and does not change the amounts reported in either period's statements. It is most often used for accrued expenses and revenue.
Why it matters in an audit or review
Reversals create two common errors: an accrual that should have been reversed but was not, which double counts expense, and a reversal that is posted twice. The team checks that large year-end accruals reverse in the next period and tests payments after year-end against both.
Example
Illustrative: on December 31 a company accrues $12,000 of unpaid wages (Dr Wages expense, Cr Wages payable). On January 1 it reverses the entry. The January 7 payroll of $30,000 is then recorded in full to wages expense, leaving net January expense of $18,000.
Common mistakes
- Reversing an accrual but also recording the actual payment against the liability.
- Reversing deferrals or estimates that were not intended to reverse.
Sources
- OpenStax, Principles of Accounting, Volume 1: Financial Accounting, Completing the Accounting Cycle (reversing entries as an optional final step)
- AICPA, AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained (substantive procedures including testing of period-end adjustments)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error