Reversing Journal Entries: What They Are + How to Do Them in QBO

In today's tutorial, we are going to talk about reversing journal entries. And this sounds like accounting jargon, and it sounds a little bit complicated, but it actually isn't. And I am going to explain to you what exactly reversing journal entry is. And I'm also going to show you an example of1 in QuickBooks Online. My name is Ronica Canna. I am a CPA, a CFA, and the founder of Montreal Financial, where you can find lots of resources for your small business and sign up for my newsletter. Okay, so what exactly is a reversing journal entry? And the simple answer to this is that it is a journal entry that reverses or cancels out another journal entry. And most popularly, most frequently, this type of journal entry is used with accrual entries. So let's define an accrual entry first. And an accrual entry is essentially a way of reflecting transactions that relate to a current period, but that are only recorded in a future period. So, for example, let's say you sold some services to a customer. Let's say Moriarty Inc. Because we're doing Sherlock Holmes. So let's say you sold your surveillance services to Moriarty Inc. You have done 75% of the work and 25% remains. But you are now at December 31, at your year end. So it's important to reflect that 75% of the sale or the revenue that you're going to make now, because it relates to the current period. And this is part of the matching principle in accounting. But also it's common sense, if you think about it. If you were to report the entire sale when you invoice your customer, which would only be in January, then you have a mismatch between the 75% of work done, which was done in 2024, let's say, and only 25% of it was done in 2025. So all that to say is that you would set up an accrual entry to reflect 75% of the invoice amount. Say the invoice amount is $10,000. You will do a journal entry that credits Your sales for 7,500, increases your sales, and then debits accrued receivable, which is an amount receivable. So now what will happen next month? You're going to create an invoice for the full $10,000. But you already recorded $7,500 of this $10,000. So what do you do? And so rather than just like splitting up the invoice and setting up 75% last month and 20 this month. You, as mentioned, you simply do a journal entry and then you reverse it in the current year. And what will happen is you will start out the year with a negative $7,500. And when you enter the $10,000 invoice, only $2,500 of that invoice will be reflected. So hopefully that makes sense. So let's take a look at this in QuickBooks Online. So now we're in the Sherlock Holmes Detective Agency. I am going to create a journal entry. So we're going to create this journal entry at July 31st. So we're going to create the initial journal entry, the accrual journal entry and then we are going to reverse it. And this is actually very straightforward in QuickBooks Online. So as initially mentioned, we are going to select the services that we provided to Moriarty. So we're going to put consulting services over here because we're increasing sales. It is a credit of $7,500. And here we can just simply write to reflect accrual for an invoice to moriart. Then on the other side of this you are going to put accrued receivable. Now it doesn't look like we have an accrued receivable. So we're going to add the account. We are going to call this receivable. The account type is going to be current assets and the detail type is simply going to be other current assets. That is fine. And now we can save this and select it from the drop down list. And you'll see in QuickBooks Online it automatically fills this amount in so that your debits and credits balance and it also copies the description over. So this is great. This is exactly what I want. And so I am going to click on save. Now, what's going to happen on your profit and loss statement? If we go to the profit and loss statement and I always like to show the impact on the reports because I think it makes it a little clearer. So if we go here to reports on the left hand side, select the profit and loss run report and you'll see we have the journal entry of $7,500. Now what we want to do is we want to reverse this for August. So let's go find this transaction and we can simply go up here and select the last journal entry that we entered. And to reverse it we would simply click on this reversal at the bottom, make sure the date is correct. And for me the reversal is going to happen on August 1st because I'm going to include the invoice on August 1st. So that is pretty much the reversing entry. Let's save and close. Now I'm going to create an invoice for Moriarty just so you can see the full impact on August 1st for consulting services. And we are going to make the invoice for $10,000. Okay, so now I'm just going to simply save and close this and I'm going to go back to my profit and loss statement. Let's go over here. And we will look at this month again, which is July, but I also want to look at August. So I'm going to display columns by months. So that way it's going to show me July and August. And you'll see the period here is July 1st to August 31st. So you will see despite having entered an invoice and let's click on this for $10,000, there is a reversing entry of $7,500 that reduces this to 2,500. So I hope this was helpful. I hope this explains a reversing journal entry and why you would want to do it. And it is something to keep in mind for transactions that relate to current periods, but are only recorded properly in a future period. And accrued salaries is a popular one because your payroll may only happen on, say, August 1st. And so August 1st is the day on which the payroll goes through, but it relates to the month of July. So you would want to accrue for the entire thing in the month of July. Okay. If you have any questions, don't hesitate to leave a comment and I will try my best to answer it. And please like and subscribe. Have a great day.