A reversing journal is a month-end entry that your accounting software automatically undoes on the first day of the next period. It exists for one purpose: to put an estimate into the month it belongs to, knowing that a real document will arrive later and carry the actual figure. The reversal clears the estimate out of the way so the real document can be posted normally, without anyone having to remember to unwind it.
Which entries should reverse
The test is whether a future transaction will record the same cost or income again. If it will, the month-end entry should reverse. If nothing else will ever post it, the entry should not reverse.
| Entry | Reverse? | Reason |
|---|---|---|
| Accrual for an electricity bill not yet received | Yes | The supplier’s bill will post the full cost next month |
| Accrual for hourly wages paid on the 7th | Yes | The payroll journal will post the actual cost |
| Accrued income for work not yet invoiced | Yes | The sales invoice will post the revenue |
| Monthly release of an annual insurance prepayment | No | It is a planned spread of a cost already posted; it should run each month as a recurring journal instead |
| Depreciation charge | No | No invoice will ever replace it |
| Reclassification of a miscoded invoice | No | It corrects a permanent error |
Prepayments are the most common source of confusion. Posting a twelve-month software bill to Prepayments and releasing one-twelfth a month is a recurring journal, set up once; see recurring journals in bookkeeping. A reversing journal for a prepayment only makes sense in the unusual case where you move a whole invoice out of the month at month end and the full cost belongs in the next one.
A worked example with the invoice arriving late
At 30 September an architect’s practice knows that structural engineering advice used on a September project will be billed at about £2,500 plus VAT. The bill has not arrived.
30 September (reverse on 1 October):
| Account | Debit | Credit |
|---|---|---|
| Subcontractor costs | £2,500 | |
| Accruals | £2,500 |
No VAT is posted. Input VAT can only be claimed from the supplier’s VAT invoice, so the accrual carries the net cost only.
1 October, the software posts the reversal automatically: debit Accruals £2,500, credit Subcontractor costs £2,500.
14 October, the engineer’s invoice arrives for £2,640 plus £528 VAT, dated 12 October, and is entered as a normal purchase invoice: debit Subcontractor costs £2,640, debit VAT £528, credit Trade creditors £3,168.
Result: September carries £2,500 of the cost. October carries £2,640 less the £2,500 reversal, so only the £140 underestimate. The VAT goes on the return covering the invoice date. The accruals account is back to nil for this item.
How double counting creeps in
Three things go wrong with reversing journals, and each one inflates or deflates a month:
- The reversal flag was not set. The accrual stays on the balance sheet, the invoice posts in October, and the cost is counted in both September and October. The accruals balance creeps up month after month.
- The invoice is backdated into the accrued month. Someone enters the October-dated invoice with a 30 September date to “match” the accrual. September now has the accrual and the invoice; October has a credit from the reversal. Enter invoices on their own date and let the reversal do the work. The cut-off at month end guide explains which date governs.
- The accrual is also cleared by hand. A bookkeeper who used to work without reversing journals manually posts the unwind as well as the software. The month gets a double credit.
Locking the closed period helps with the second problem: a backdated invoice is then rejected or flagged.
Reviewing that reversals ran
Make this part of the first week of each month:
- Open the accruals account on the first day of the new period. Every accrual posted at the previous month end should show a matching reversal dated day one, leaving only items you deliberately kept (such as a holiday pay balance that is updated rather than reversed).
- List all journals flagged as reversing and confirm each has a partner entry. A filtered journal report by source or reference does this quickly.
- Compare each actual invoice to its accrual. Consistent large gaps mean the estimates need a better basis, such as last bill plus a known price change.
- Check that the reversal landed in the next period, not in a later one; a reversal date typed as 1 November instead of 1 October leaves October overstated.
At the financial year end the same logic applies, but the reversals land in the new year, which may still be open while the old year’s accounts are being finalised. Keep the year-end accruals schedule in the close file so the accountant can tie the balance sheet figure to the reversals. Every manual journal, reversing or not, should carry a preparer, a reason and supporting papers; see manual journal approval and audit trail.
Wage accruals have a few extra wrinkles (employer NIC, pension and bonuses), set out in payroll accruals at month end. To see how it works in practice, post a test accrual and its reversal as a Nexbal beta user.