Reversing journals explained

Q: How does it work for an accrual?

Illustration only. A company with a 31 March year end has not received its electricity bill for the quarter January to March. It estimates the cost at £900. DateEntryDebitCredit 31 MarchAccrue the estimated costElectricity £900Accruals £900 1 AprilReverse the accrualAccruals £900Electricity £900 20 AprilPost the actual bill, net of VATElectricity £950Supplier £950 The year to 31 March shows £900 of electricity for the quarter. In the new year the electricity account shows a credit of £900 and a debit of £950, a net charge of £50. That £50 is the difference between the estimate and the bill. The new year's own electricity charges then accumulate normally. If the estimate was badly wrong the difference shows up early in the new year and can be investigated.

Q: How does it work for a prepayment?

Illustration only. On 1 January a company with a 31 March year end pays £1,200 for a year of software support. At 31 March nine months, £900, relate to the next financial year. 31 March: debit prepayments £900, credit software costs £900, so the closing year carries only £300. 1 April: reverse with debit software costs £900, credit prepayments £900. For annual accounts this is enough: the whole £900 belongs to the new year and is charged in that year. Where the business prepares monthly management accounts, a single reversal on 1 April puts all £900 into April. In that case the prepayment is better released at £100 a month through a prepayment schedule rather than reversed in one go. The same logic applies to accrued income and deferred income, discussed in our page on accrued income.

Q: When should a period end journal not be reversed?

Corrections of errors. A journal that moves a cost from the wrong nominal code to the right one is permanent. Reversing it reinstates the error. Invoices posted into the old period. If the year end is still open and the actual invoice is entered with a date in the old year, no accrual is needed for it. An accrual alongside the invoice, reversed or not, double counts the cost in the closed year. Depreciation, provisions and similar adjustments. These are reviewed and updated each period, not undone. Prepayments released monthly. As above, a schedule replaces the reversal. The cut off review at the year end should decide, item by item, which approach applies.

Q: What mistakes come up most often?

Reversing twice. The software reverses the journal automatically and someone also posts a manual reversal. The new period's costs are understated by the amount of the accrual. Forgetting to reverse. The accrual stays in the balance sheet and the invoice is posted in full, so the cost appears in both years. The accruals account balance at the next period end, made up of old items, is the usual clue. Wrong reversal date. A reversal dated 31 March cancels the accrual in the year it was meant to affect. Posting the invoice against the accruals account as well. Once a reversal has been posted, the invoice goes to the expense code, not to accruals. No supporting schedule. Section 386 of the Companies Act 2006 requires records sufficient to show and explain the company's transactions. Each accrual should be backed by a schedule showing what it is for and how the estimate was made. A quick control is to check, after the first month of the new period, that the accruals and prepayments accounts hold only new items, and to review the trial balance for expense codes showing an unexpected credit. Our page on the month end close sets out where these checks fit in a routine. Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

A reversing journal is a period end adjustment that is automatically undone on the first day of the next period. It is used for accruals and prepayments so that the year end accounts show the right cost, while the real supplier invoice can still be posted in the normal way when it arrives. Without the reversal, the cost would be counted twice: once in the accrual and again when the invoice is entered.

Tax investigation insurance from £108.75 a year (£9.06 a month).Pays up to £100,000 of your accountant's fees if HMRC opens an enquiry. No excess. Buy online in a few minutes.

See my price in 2 questions How the cover works Accountant? Offer cover to your clients or call 01795 841 310

Why are accruals and prepayments needed at all?

Company accounts must be prepared on the accrual basis. FRS 102 paragraph 2.48 requires financial statements, apart from cash flow information, to use the accrual basis, which the FRS 102 glossary describes as recognising the effects of transactions when they occur, not when cash is received or paid, and reporting them in the periods to which they relate. For small companies, paragraph 14 of Schedule 1 to the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 (SI 2008/409) says that all income and charges relating to the financial year must be taken into account without regard to the date of receipt or payment.

So a business that has used electricity in March but not yet been billed must still charge that cost to March. It does so with an accrual. A business that paid in December for services covering the following year carries the unused part forward as a prepayment. The calculation of each is explained in our page on accruals and prepayments. This page deals with what happens to those adjustments afterwards.

What does a reversing journal actually do?

A period end accrual is a journal entry that debits an expense and credits the accruals account on the balance sheet. A reversing journal is the same entry with the debit and credit swapped, dated the first day of the next period. Most accounting software lets the preparer tick a box to reverse a journal automatically on a chosen date, which creates both entries at once.

The reversal leaves the closed period untouched. The year end balance sheet still shows the accrual, and the year end profit and loss account still carries the cost. What changes is the opening position of the new period: the accrual has been cleared out of the balance sheet and replaced by a temporary credit on the expense account.

Worried about an HMRC check? Tax investigation insurance pays your accountant’s fees if HMRC opens an enquiry or compliance check. Solar Protect cover pays up to £100,000 with no excess. It never pays tax, interest or penalties.

From £108.75 a year (£9.06 a month) for individuals, £117.57 for sole traders and £207.50 for companies and partnerships, including IPT and the £20 admin fee.

See my price in 2 questions or call 01795 841 310.

★★★★★ Rated 4.9 out of 5 on Trustpilot from over 160 reviews

Why post the reversal at the start of the next period?

Because that is when the supplier invoice arrives and is processed through the purchase ledger in the ordinary way, at its full amount. When the invoice is posted, its debit to the expense account cancels against the credit left by the reversal. The new period ends up bearing only the part of the bill that belongs to it.

The alternative, leaving the accrual in place and posting the invoice directly against it, works for one or two items but breaks down in practice. The invoice usually differs from the estimate, it may cover a longer period than the accrual, and the person entering it in April may not know that an accrual exists. Routine reversal means every invoice can be posted the same way, with the accruals account cleared automatically and any estimating difference flowing into the new period where it can be seen.

How does it work for an accrual?

Illustration only. A company with a 31 March year end has not received its electricity bill for the quarter January to March. It estimates the cost at £900.

Date	Entry	Debit	Credit
31 March	Accrue the estimated cost	Electricity £900	Accruals £900
1 April	Reverse the accrual	Accruals £900	Electricity £900
20 April	Post the actual bill, net of VAT	Electricity £950	Supplier £950

The year to 31 March shows £900 of electricity for the quarter. In the new year the electricity account shows a credit of £900 and a debit of £950, a net charge of £50. That £50 is the difference between the estimate and the bill. The new year’s own electricity charges then accumulate normally. If the estimate was badly wrong the difference shows up early in the new year and can be investigated.

How does it work for a prepayment?

Illustration only. On 1 January a company with a 31 March year end pays £1,200 for a year of software support. At 31 March nine months, £900, relate to the next financial year.

31 March: debit prepayments £900, credit software costs £900, so the closing year carries only £300.
1 April: reverse with debit software costs £900, credit prepayments £900.

For annual accounts this is enough: the whole £900 belongs to the new year and is charged in that year. Where the business prepares monthly management accounts, a single reversal on 1 April puts all £900 into April. In that case the prepayment is better released at £100 a month through a prepayment schedule rather than reversed in one go. The same logic applies to accrued income and deferred income, discussed in our page on accrued income.

When should a period end journal not be reversed?

Corrections of errors. A journal that moves a cost from the wrong nominal code to the right one is permanent. Reversing it reinstates the error.
Invoices posted into the old period. If the year end is still open and the actual invoice is entered with a date in the old year, no accrual is needed for it. An accrual alongside the invoice, reversed or not, double counts the cost in the closed year.
Depreciation, provisions and similar adjustments. These are reviewed and updated each period, not undone.
Prepayments released monthly. As above, a schedule replaces the reversal.

The cut off review at the year end should decide, item by item, which approach applies.

What about VAT and tax?

An accrual is an estimate, not a VAT invoice. VAT Notice 700 paragraph 16.2.1 explains that customers need VAT invoices as evidence for reclaiming input tax, so input tax is claimed when the actual invoice is posted, not through the accrual or its reversal. Accruals for costs where VAT is recoverable are therefore normally posted net of VAT, and neither the accrual nor the reversal should touch the VAT control account.

For income tax and corporation tax, trading profits follow generally accepted accounting practice: section 25 of the Income Tax (Trading and Other Income) Act 2005 for traders not using the cash basis, and section 46 of the Corporation Tax Act 2009 for companies. Accruals and prepayments therefore affect taxable profit in the period to which they relate. A sole trader on the cash basis does not post accruals at all, because section 25 applies only to trades to which the cash basis does not apply.

What mistakes come up most often?

Reversing twice. The software reverses the journal automatically and someone also posts a manual reversal. The new period’s costs are understated by the amount of the accrual.
Forgetting to reverse. The accrual stays in the balance sheet and the invoice is posted in full, so the cost appears in both years. The accruals account balance at the next period end, made up of old items, is the usual clue.
Wrong reversal date. A reversal dated 31 March cancels the accrual in the year it was meant to affect.
Posting the invoice against the accruals account as well. Once a reversal has been posted, the invoice goes to the expense code, not to accruals.
No supporting schedule. Section 386 of the Companies Act 2006 requires records sufficient to show and explain the company’s transactions. Each accrual should be backed by a schedule showing what it is for and how the estimate was made.

A quick control is to check, after the first month of the new period, that the accruals and prepayments accounts hold only new items, and to review the trial balance for expense codes showing an unexpected credit. Our page on the month end close sets out where these checks fit in a routine.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.