Reversing entries

A reversing entry is the exact mirror of an adjusting entry, dated the first day of the next period. It's optional — it changes no period's profit — but it lets the bookkeeper (or the payroll system) record the later payment in the usual way without remembering the accrual.

Take Lumen's April payroll. On 30 April it accrued 2,700 of salaries for the nine working days since the last payday. On Friday 1 May it pays 3,000 for the ten days from 20 April to 1 May. Lumen itself doesn't use reversing entries — its bookkeeper splits that payment by hand, as in the accruals lesson. If it did reverse, it would credit Salaries expense 2,700 on 1 May, record the whole 3,000 payment as expense, and May's salary expense for that payment would net to 300 — one day's pay, the right figure.

Why bother? Without the reversal, whoever records the 1 May payment must know that 2,700 of it settles a liability and split the payment. With many accruals — and with payments processed by people or systems that never see the adjustments — that's where double-counting creeps in. Reversals make every subsequent payment routine.

What to expect in the ledger. Straight after a reversal, the expense account shows a credit balance (the reversed amount) and the accrued liability is zero. That looks odd but is temporary: the payment's full debit brings the expense back to the right figure for the new period. Many systems post reversals automatically when an accrual is flagged "auto-reverse".

When it works. Reverse adjustments that will be "completed" by a later cash transaction recorded routinely through an income or expense account: accrued salaries, interest, utilities and unbilled revenue; and deferrals originally recorded through the income statement (a prepayment debited to expense, a deposit credited to revenue).

When not to. Don't reverse depreciation, amortisation or allowance adjustments — no later transaction completes them, so reversing would simply undo the charge. And don't reverse a deferral recorded in a balance-sheet account (a prepayment debited to Prepaid insurance): reversing it would put the used cover back into the asset.

The one rule that matters: be consistent. If an accrual is reversed, the later payment must be recorded in full as expense; if it isn't reversed, the payment must clear the liability. Mixing the two methods double-counts or omits the amount.