Plain definition
A reversing entry is a journal posted at the start of a new period to undo a specified prior-period adjustment. It is often used for a short-term estimated accrual when the next period's normal invoice or payroll process will record the actual cost. The prior-period accounts retain the adjustment; the reversal merely clears the temporary balance so the actual entry can be processed once.
Not every adjustment should reverse. Depreciation, a prepaid-expense release, a correction, or an accrual that remains payable may need to remain in the ledger. The decision follows the nature of the balance and the planned processing, not a blanket month-end rule.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
At the December close, finance estimates of legal work received but not yet invoiced and debits legal expense, credits accrued expenses. On 1 January, an automatic reversing entry debits accrued expenses and credits legal expense for . When the lawyer's January invoice for arrives, accounts payable records the actual expense. January then bears only the difference from the December estimate, while December retains for work performed in December.
The invoice must still be checked. If it relates partly to January work or the estimate was materially wrong, finance needs an evidence-based adjustment rather than relying on the automatic reversal.
Why it matters
Without the reversal, recording the invoice as a normal January expense can charge the December work twice across the two periods. Reversing every accrual without a schedule creates the opposite risk: a continuing payable can disappear from the balance sheet.
Practical consequence
Tag each adjusting journal as reversing or non-reversing when it is prepared, and state the reversal date and linked invoice, payroll, or other follow-up record. At the next close, compare the reversed estimate with the actual entry and investigate material differences. Restrict automatic reversals to approved journal types and report any reversal that failed or was posted late.