Reversing Entries

Reversing entries are the important journal entries in the accounting. It actually helps a lot in implementation of the accrual basis of accounting which requires the recording of expenses and revenue items in the month/ year to which they relate. No matter whether the payment is paid/ received or not.

In modern accounting systems, there is no need to pass the reversing entries. When you are passing a accrual journal entry, you just need to flag it as a reversing entry, so that upon the arrival of a date, software does the reversing entry itself without human involvement. Reversing entries are made on the very first day of the accounting period.

Example # 1

In order to make the concept of reversing entry more crystal clear, let’s take an example:

Electricity bill for every month comes after the end of the month, let’s say electricity bill of the month of December comes on January. Under this case, we are not aware of the amount of bill. But according to the accrual basis of accounting, we have to estimate it. Let’s suppose the estimated electricity bill amount is $5,000. We will pass on following adjusting entry on 31 Dec:

      Debit Credit
Electricity Expenses   5,000
  Accrued Electric Expenses 5,000

Now, on the 1st January, we will pass on the following reversing entry:

      Debit Credit
Accrued Electric Expenses   5,000
  Electricity Expenses 5,000

As you can see that the electricity expenses was recorded in the month of December over the basis of accrual accounting. On the 1st January, we reversed the entry which caused the negative amount in the Electricity Expenses ledger account. Later when we receive the Electricity Bill Invoice, we can make the entry as follows:

      Debit Credit
Electricity Expenses   5,000
  Accounts Payable 5,000

By making the above journal entry, we are making the Electric Expenses account to zero. The example above shows how we can record the electricity expense in the correct month with the help of a reversing entry.

Example # 2

B Engineering is involved in the development of infrastructure and road. The following data is available regarding its financial year ended 31st Dec 2015:

  1. On 1st January, 2016 B ENGINEERING acquired a warehouse at a monthly rent of $800.
  2. B ENGINEERING has to pay employee’s wages amounting to $4,000 for December.
  3. On 31th December, B ENGINEERING provided services for constructing the road near the sea port. For rendering its services, it charged the customer $10,000.
  4. Electricity bill received on 31 Dec, 2017 amounting to $ 2,000.
  5. Revenue received from sale of scrap stock is $ 2,000. Payment has not received for this yet.


Pass the adjusting journal entries and corresponding reversing entries.


First we need to pass on the adjusting entries of the above transactions.

  Debit Credit
Rent expense 800  
Rent payable   800
Being the rent of December recorded on accrual basis of accounting.    
Payroll expense 4,000  
Accrued payroll   4,000
Being the payroll of December recorded on accrual basis of accounting.    
Accounts receivable 10,000  
Sales   10,000
Being the revenue of December recorded on accrual basis of accounting.    
Electricity expense 2,000  
Electricity bills payable   2,000
Being the electric expense of December recorded on accrual basis of accounting.    
Other receivable 2,000  
Other income   2,000
Being the scrap sale income of December recorded on accrual basis of accounting.    

Now, it is the time to make reversing entries. These entries are passed on at the start of the new month which is January 2017 in our example.

  Debit Credit
Rent payable 800  
Rent expense   800
Accrued payable 4,000  
Payroll expense   4,000
Sales 10,000  
Accounts Receivable   10,000
Electricity Bill Payable 2,000  
Electricity expense   2,000
Other income 2,000  
Other receivable   2,000

When the payment will be done in the month of January, we will debit relevant expense and credit the revenue item. This way, the expense and revenue accounts will become zero in balance.

Reversing entries are important journal entries that are passed at the start of the period related to previous period. Reversing entries is a simple concept that most of the student find it difficult to handle. Following problems and solutions will help you greatly in getting maximum marks in the examinations.

Reversing Entries Problem and Solutions

Sunil and Gupta are running a cosmetics business since 5 years. Following is the data of unadjusted trial balance received from their accounting records.

Debit Balances   Credit Balances  
Cash Rs.40,000 Accounts payable Rs.85,000
Accounts receivable 350,000 Sales revenue 850,000
Prepaid insurance 40,000 Purchase returns 90,000
Purchases 690,000 Capital ?
Utility expense 25,000    
Rent expense 180,000    
Office equipment 400,000    
Total 1,725,000 Total 1,725,000

Data for Adjustment: (1) Prepaid insurance Rs.15,000. (2) Depreciation expense Rs.30,000. (3) Inventory ending Rs.50,000. (4) Unpaid salaries Rs.15,000. (6) Unrecorded sales Rs.50,000.

You being the management accountant of the business, are required to passing on necessary reversing entries.


Sunil and Gupta

Reversing Entries

For the Period Opening July 1, 202X

Date Particulars Folio Debit Credit

Salaries payable

           Salaries expense



  (To reverse the salaries expense)