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Understanding Reversals

This guide explains how to correct mistakes in your financial records safely. In accounting, we follow a golden rule: Never Delete, Always Reverse.

The Golden Rule: Never Delete, Always Reverse

In a perfect world, we wouldn't make mistakes. In the real world, we do. When you record a transaction incorrectly (like a wrong invoice amount or a payment sent to the wrong vendor), you might be tempted to just hit "Delete."

But in accounting, deleting is dangerous because:

  1. It breaks the audit trail: You lose the history of what happened.
  2. It creates gaps: Invoice numbers must be sequential (INV-001, INV-002, INV-003). Deleting INV-002 makes auditors suspicious.
  3. It's often illegal: Many tax regulations forbid deleting posted transactions.

The Solution: Reversal Instead of deleting, we create a Reversal (or Correction) entry. This is a new transaction that effectively "zeros out" the mistake.

Visualizing the Concept

Think of it like math. If you added +100 by mistake, you don't erase it. You add -100 to get back to zero.

Original Mistake: + $100.00 (Wrong Revenue) Reversal Entry: - $100.00 (Negative Revenue) --------------------------------- Net Result: $0.00 (Corrected)

Reversing Invoices

When a customer returns an item or you billed them incorrectly, you reverse the invoice.

For Customer Invoices (Sales)

Reversing a customer invoice creates a Credit Note.

  1. Navigate to the posted Invoice.
  2. Click Create Credit Note (or "Reverse").
  3. The system creates a new document (Credit Note) with negative amounts.
  4. Reconcile the Credit Note against the original Invoice to "pay" it off.

For Vendor Bills (Purchases)

Reversing a vendor bill creates a Debit Note (also called a Vendor Refund/Credit).

  1. Navigate to the posted Bill.
  2. Click Create Debit Note.
  3. This reduces the amount you owe the vendor.

Reversing Payments

Sometimes you record a payment by mistake—maybe you selected the wrong date, the wrong journal, or the check bounced.

How to Reverse a Payment

  1. Go to Accounting → Payments.
  2. Open the confirmed Payment.
  3. Click Cancel (or Reverse).
    • Note: If the payment is already reconciled with a bank statement, you must Unreconcile it first.
  4. The system changes the status to Cancelled and posts a reversing journal entry to fix your ledger.

What happens behind the scenes?

If you originally recorded:

Dr. Bank $500 Cr. Accounts Receivable $500

The reversal will record:

Dr. Accounts Receivable $500 Cr. Bank $500

This puts the money "back" into the customer's debt (so they still owe you) and removes it from your bank balance in the system.

Unreconciling: Unmatching a Payment

Sometimes the payment itself is correct, but it was matched (reconciled) to the wrong invoice. You don't need to reverse the payment, just the matching.

  1. Go to the Payment or the Invoice.
  2. Look for the Payment Allocation or Credits section.
  3. Click Unreconcile or Remove Allocation.

Result:

  • The Invoice becomes Open (Unpaid) again.
  • The Payment becomes Unallocated (it's sitting in the customer's account, ready to be incorrectly applied).
  • No money "moved," only the link between documents was broken.

Troubleshooting

Q: Why is the "Reverse" or "Cancel" button grayed out?

This usually happens for two reasons:

  1. Lock Dates: The transaction belongs to a period that has been locked (closed). You cannot change history in a closed year/month. You must ask an administrator to unlock the period or create the correction in the current open period.
  2. Reconciled: You cannot cancel a payment that has been reconciled with a Bank Statement. You must first go to the Bank Reconciliation and remove the match there.

Q: Can I just edit the invoice instead?

If the invoice is in Draft status, yes! You can edit, delete, or change anything. Once it is Posted, it is legal and final. You must use the Reversal method.