How reversing entry works
Reversing entries are optional but common for accrual adjustments that will be replaced by an actual transaction early in the next period, such as an accrued expense that will be paid, or accrued revenue that will be invoiced. The reversing entry simply flips the debit and credit of the original adjusting entry, dated the first day of the following month, so the accrual effectively disappears from the new period's opening balances.
Without a reversing entry, a bookkeeper has to remember which part of an incoming invoice was already accrued and manually split it. With a reversing entry posted, the full invoice can be recorded normally when it arrives, and the accrual cancels itself out in the general ledger, cutting the chance of expenses being counted twice. This matters most for businesses with a high volume of monthly accruals, where manual tracking of partial amounts becomes error-prone.
Example
At January month-end, a bookkeeper accrues $3,500 for a utility bill not yet received, debiting utility expense and crediting accrued liabilities. On February 1, a reversing entry flips that entry, crediting utility expense and debiting accrued liabilities by $3,500. When the actual $3,600 utility bill arrives in February, it is recorded in full, and the net expense for February shows the correct $100 difference.
Reversing entry in QuickBooks Online vs Xero
QuickBooks Online lets a user mark a journal entry as reversing when creating it, and it automatically generates the offsetting entry on the first day of the next period. Xero does not have a one-click reversing feature built into standard manual journals, so many bookkeepers create the reversal manually or through a repeating journal template dated for the following month.
Common mistakes
- Forgetting to post the reversing entry after an accrual, which causes the real invoice to be recorded on top of the accrual and overstates the expense for that period.
- Dating the reversing entry incorrectly, such as the last day of the old period instead of the first of the new one, which pulls the reversal into the wrong month.
- Reversing an accrual that was only partially correct without adjusting the variance, which lets a small estimating error roll forward unnoticed into the next period's numbers.
Why it matters
A missed or misdated reversing entry quietly inflates or understates a month's expenses, which can make a profitable month look like a loss or hide a real cash problem from an owner trying to plan payroll or a draw. For a business reporting to a lender or board, repeated accrual errors raise doubts about the whole close process. Getting reversals right keeps month-to-month comparisons meaningful instead of noisy.
Related terms
How LedgerBPO handles reversing entry
When our team accrues an expense or revenue item at month-end, we post the matching reversing entry for the next period as part of the same close checklist. That keeps your general ledger from double-counting an accrual once the real invoice or payment lands in your books.