For example, if you posted a purchase order with the wrong quantity of products in one period, you could undo that posting with a reversing entry at the beginning of the next period. You could correct the entry as, say, invoiced. Reversing entries can make it easier to record future transactions. For example if Company X wanted to make an adjustment for $600 in unpaid wages, it would debit that amount from the wages expense account and credit it to the wages payable account. If the business owner does not make a reversing entry and pays more in wages in the next month, they would need to later on make a more complicated entry taking into account that part of November’s payroll has already been recorded. However, reversing entries can make it easier. In this scenario, Company X can simply make a reversing entry at the beginning of the November accounting period. The reversing entry will decrease wages payable by $600 and decrease wages expense by $600. Then, when the November payroll is paid in whatever amount, it can be recorded by increasing (debiting) wages expense and decreasing (crediting) cash with the total amount paid.
How Reversing Entries Work
Reversing entries work to clear out any accruals that you do not want reflected in the new accounting period. You might also need to make a reversing entry if you mistakenly paid a vendor twice for a good, or if you made a miscalculation. Even if you don’t have accounting software, a reversing entry works by simply adjusting an entry from credit to debit or vice versa during the current period depending on the transaction. Another example of a reversing entry would be if you accrued a $10,000 expense in February, but the supplier does not send the actual invoice until March. You would do a reversing entry at the beginning of the month in anticipation of the invoice, which will result in a debit to accrued expenses payable and a credit to expense. Then, once the actual invoice arrives, you would record the entry and the $10,000 expense credit would balance out to $0.
Types of Reversing Entries
There are two types of reversing entries—automatic and manual. A manual reversing entry is when you record your journal entry yourself, ensuring that you record the appropriate entries at the end of the preceding month as well. With automatic reversing entries, your accounting software will automatically make a journal entry at the end of the month and record a reverse entry at the start of the new month. Both types of reversing entries work the same as far as debiting and crediting your general ledger.
