Why reversing entries are needed

You can post a manual reversing entry at any time during the month as needed to balance the ledger. For example, if you post a cash expense to the wrong line item on the income statement, you can reverse the entry by crediting the incorrect account and debiting the correct account. Some general ledger software provides an option to create a journal entry that will automatically reverse without any additional effort on your part.

Automatically-reversing journal entries are usually posted during the monthly closing cycle, and then will reverse automatically on the first day of the new accounting period. These are useful because they can help reduce accounting errors as a result of overlooking an entry. The important thing about automatically reversing entries is to be sure that the corresponding expense posts in the new month.

Otherwise you will need to repeat the entry during the next closing cycle. Tara Kimball is a former accounting professional with more than 10 years of experience in corporate finance and small business accounting. She has also worked in desktop support and network management. Her articles have appeared in various online publications. Examples of reversing entries To get a deeper understanding of how these entries work, it can be helpful to consider a few typical scenarios.

Move your business forward with reversing entries For accrual-based businesses, reversing entries can reduce unwanted expenses and prevent wasted time and work-hours spent chasing errors.

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This end of the year adjusting journal entry looked like this:. Paul can reverse this wages accrual entry by debiting the wages payable account and crediting the wages expense account. This effectively cancels out the previous entry. Yes, we did. This reversing entry actually puts a negative balance in the expense. See how easy that is? Once the reversing entry is made, you can simply record the payment entry just like any other payment entry.

Since half of the wages were expensed in December, Paul should only expense half of them in January. The net effect of both journal entries have the same overall effect.