What it means
A company uses electricity in September but does not receive the bill until October. To report September's cost, it estimates the amount and records an accrued expense.
When October opens, it may reverse that estimate before posting the actual invoice. The first journal debits expense and credits accrued liabilities.
The reversing journal debits the accrued liability and credits expense for the same estimate, and the later invoice debits expense and credits accounts payable through the ordinary process. Across both periods, the total expense then matches the invoice instead of counting the cost twice.
Reversal works well for short-term estimates that the normal invoice process will replace. It is not a blanket rule for every liability or prepayment, because some balances need settlement, allocation or adjustment rather than an automatic mirror entry.
If an invoice covers usage in both months, split the periods using evidence before deciding where each part of the cost belongs. Many accounting systems can create reversals automatically on a schedule.
Automation does not remove the need to choose the right journal and period, and a configured setting may not run if the next period has not opened or the journal was not eligible. Compare original and reversal references, not only the balance in one account.
A close checklist should identify which accruals will reverse, when, and who will confirm it. Adding the supplier, period, estimate and expected invoice to each accrual makes a missing or duplicate reversal easier to spot.
If the invoice arrives before the reversal is posted, review how the system handles both items instead of cancelling a valid supplier invoice to tidy the trial balance. Differences deserve a look.
If the actual invoice is lower than the estimate, the new period may show a net credit, and a large gap can mean the estimate was weak or that the invoice covered a different period. Reconcile the accrued liability account regularly, because old balances with no invoice, duplicated accruals and reversals posted in the wrong period can sit hidden for months.
In practice
Real-world examples.
Example
A manufacturer accrues $48,000 of wages for the last three working days of the month, then reverses the accrual on the first day of the new month before the full payroll is processed.
Example
A marketing agency accrues $9,000 for freelance work not yet invoiced. The reversal runs automatically, and when the $9,500 invoice is posted the net expense for the new period is $500.
Example
A finance team runs a journal reversal report at close and finds a $9,000 accrual that did not reverse as scheduled. Left alone, the invoice would have put $18,000 of cost into the ledger for $9,000 of work.
Formula
Calculation
Next-period net expense = actual invoice expense - reversed estimate
Suppose the September electricity estimate is $12,000. At the end of September, expense and accrued liabilities both rise by $12,000. On October 1 the reversal clears the liability and credits October expense by $12,000. The October invoice arrives for $12,400 and is posted normally, so October expense from these entries is $12,400 - $12,000 = $400. Across both months expense totals $12,000 + $400 = $12,400, which matches the invoice. Check the invoice period and any tax treatment before applying the shortcut.Case study
Seen in the real world.
This entirely fictional example follows Crescent Clinics, an invented group of medical clinics. Its September service accrual was not reversed, and the October supplier invoice was then booked in full. A review found an overstated liability and duplicated expense across the two months.
Finance corrected the ledger and added a linked reversal check to its close routine, matching each accrual to its reversal and its invoice.
The case is illustrative only and does not imply that every accrual should reverse automatically. The clinics now keep a short list of accruals that are settled or adjusted another way, so the checklist stays accurate.
Watch out
Common mistakes.
- Posting the invoice without checking whether the earlier accrual has reversed.
- Reversing a liability that should be settled or adjusted through another method.
- Assuming an automatic setting ran without reconciling journal status and balances.
Questions
People also ask.
What is an accrual reversal?
It is a journal that offsets an earlier accrual, commonly in the following accounting period. It keeps the earlier period's estimate in place while clearing the way for the real invoice.
Why is it needed?
It allows the actual invoice to be posted normally without duplicating the earlier estimate. Without it, staff would need to match every invoice to a past accrual by hand.
Can it be automatic?
Yes, many ledgers support scheduled reversals, but the criteria, period and posting result still need review. Test the settings in your own ledger before relying on them at a busy close.
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