A reversal is an accounting process where a transaction from a prior period is nullified to rectify an error, reverse an accrual, or adjust a temporary discrepancy. This process ensures that the financial statements accurately reflect the organization's transactions. For example, if an incorrect amount was recorded for a sales transaction, a reversal entry of that incorrect transaction combined with the correct transaction ensures accuracy in the records.
Reversals are crucial for maintaining the integrity of financial data, and they are especially relevant during month-end processes where preliminary records are amended for accuracy. Consider a scenario during month-end reconciliation: an accrual for pending expenses is made, and the actual invoice is received later. By reversing the accrual and recording the actual expense, the financial records avoid duplication and reflect the actual scenario accurately. Therefore, the process of reversal supports transparency and thoroughness in financial reporting.