reversing entries
/ rih-VUR-sing EN-treez /
Suppose at year-end you accrued 4,000 of wages your staff earned in late December but were paid in early January. Come January, when you actually pay the full two-week payroll of, say, 10,000, the bookkeeper has to remember that 4,000 of it already hit last year's books — splitting the payment awkwardly between Wages Payable and Wages Expense. That is easy to get wrong. A reversing entry is an optional convenience entry, made on the first day of the new period, that undoes a prior accrual so routine transactions can be recorded normally without anyone having to remember the split.
It works by flipping the original adjusting entry. The December accrual was: debit Wages Expense 4,000, credit Wages Payable 4,000. On 1 January you reverse it: debit Wages Payable 4,000, credit Wages Expense 4,000. This briefly leaves Wages Expense with an unusual 4,000 credit balance. Then when the full 10,000 payroll is paid in January, the clerk simply debits Wages Expense 10,000 and credits Cash 10,000, the way any normal payroll is recorded. The leftover 4,000 credit nets against it, so only the 6,000 actually earned in January remains as January expense — exactly the right answer, with no special handling.
Reversing entries are purely optional and change no final result; their only purpose is to simplify the bookkeeping for accruals (and certain deferrals) in the following period, especially in systems with high transaction volume. They are typically applied only to accruals, not to depreciation or to deferrals recorded as assets and liabilities. The common misunderstanding is to think reversing entries are required or that they alter profit — they do neither; the same net income results whether or not you use them.
Year-end accrual: debit Interest Expense 300, credit Interest Payable 300. On 1 January, reverse it: debit Interest Payable 300, credit Interest Expense 300. When the full 1,200 interest is later paid, a plain entry of debit Interest Expense 1,200 / credit Cash 1,200 leaves exactly 900 as the new year's expense.
A reversing entry lets the next period's payment be booked the simple, normal way.
Reversing entries are always optional and never change net income — they only make next period's bookkeeping simpler. They are normally used for accruals, not for depreciation.