What Is a Reversing Journal Entry And How to Enter it in QBO?
Journal entries can be perplexing for small business owners/non accountants, or accountants/bookkeepers in the early stages of their careers. Reversing journal entries, sound even more complicated.
In this post (and related video tutorial), my goal is to show you that they are relatively straightforward and, once understood, an incredibly useful bookkeeping tool.
What Exactly Is a Reversing Journal Entry?
A reversing journal entry is just what it sounds like:
It’s a journal entry that cancels out another journal entry.
Most often, it is used in conjunction with and to reverse accrual journal entries.
What’s an Accrual Journal Entry?
To properly understand reversing journal entries, you must understand accrual entries:
An accrual entry records revenue or expenses that belong to the current period but will only be invoiced or paid in the future.
This is part of the matching principle in accounting: you want to recognize expenses and revenues in the period they’re actually earned or incurred rather than when you receive payment for an invoice from a customer or make payment towards a bill from a supplier.
Example Scenario
Let’s use a practical example:
Imagine you run the Sherlock Holmes detective agency and sell consulting services.
You’re doing work for a client called Moriarty Inc.
By December 31st (your year-end), you’ve completed 75% of the work—but you plan to invoice the full amount in January.
Suppose the full invoice will be $10,000:
$7,500 worth of work was completed this year.
$2,500 worth will be completed next year.
If you simply wait and record the whole $10,000 sale in January, you’ll overstate next year’s income and understate this year’s income.
Solution: Accrual Entry
You record $7,500 of sales revenue in December:
Credit: Sales $7,500
Debit: Accrued Receivable $7,500
This ensures your profit and loss for the year properly matches the work performed.
Problem in the New Year
When you actually invoice the client in January for the full $10,000, you’d end up recording:
The original $7,500 (already accrued)
The full $10,000 invoice
That would overstate your revenue by $7,500
Solution: Reversing Entry
To fix this, you would use a reversing journal entry dated January 1st:
Debit: Sales $7,500
Credit: Accrued Receivable $7,500
This cancels out the accrual automatically.
So when you enter the $10,000 invoice in January, only $2,500 of new revenue is actually recognized for that month in your profit and loss statement (because $7,500 of it was already recognized last year).
Why Use a Reversing Entry?
Avoid double-counting revenue or expenses.
Make your books easier to maintain.
Align with the matching principle by ensuring income and expenses are reported in the correct period.
Other Common Uses
In addition to reversing accrued revenues, reversing entries are also very commonly used for accrued expenses:
Example: Salaries. If payroll hits on August 1st but relates to July, you’d accrue it in July, then reverse the entry in August.
Similar to our invoice example above, you might only receive a bill from a supplier in January, however, most of the work was done in December.
How to Record Accrued Revenues and Reversing Journal Entry in QuickBooks Online
Here’s a simplified step-by-step of what I demonstrated in the video:
Record the Accrual on December 31
Go to + New > Journal Entry
Credit Sales $7,500
Debit Accrued Receivable $7,500
Add a clear description like “Accrual for invoice to Moriarty Inc.”
2. Create the Reversing Entry On January 1
Open the original journal entry in QuickBooks Online.
Click Reverse at the bottom.
Make sure the date is set to January 1.
Save and close.
QuickBooks Online copies and reverses the amounts for you automatically.
Enter the Invoice
Create your $10,000 invoice for January 1 as usual.
Since you have the reversing entry, only the work done for $2,500 will be reflected on January’s profit and loss.
Final Thoughts
Reversing entries are an important accounting tool. They make sure your financial reports truly reflect the period in which work was done and simplify the process when you record the real transaction at a later date.
Looking for Help with Your Accounting?
Check out my resources below:
📘 QuickStart Your QuickBooks : A detailed, practical guide with step-by-step instructions, screenshots, and best practices to help you manage your accounting without stress in QBO. Learn More
🎥 QBO Made Simple Masterclass: A series of video trainings that walk you through the key features, common tasks and time saving tips in QuickBooks Online to help you feel more confident that you are doing it right . Learn More
💬 Consulting Services Need help with QBO setup, cleanup, or questions specific to your business? Book a one-on-one session for personalized guidance. Learn More
