Red reversal

What it means

A red reversal corrects a wrong accounting entry by repeating the same entry with a negative amount on the same sides of the accounts. The original entry is fully cancelled and the correct one is then posted.

The name dates from manual bookkeeping, when negative amounts were written in red ink. Today software shows them with a minus sign, but the principle is unchanged.

The alternative is a black reversal, a contra entry with the sides swapped. It also corrects the balance but inflates turnover on both sides and distorts the trial balance.

How it works in practice

If an accountant mistakenly posts a rent invoice to materials, a red reversal removes it from the materials account and it is reposted to rent. Turnover on both accounts then reflects reality.

Every correction needs supporting evidence, usually an internal document explaining the error and referring to the original document. Corrections may not be made by deleting entries, so an audit trail remains.

When correcting invoices to a customer, a corrective invoice or credit note is issued instead. A red reversal is an internal bookkeeping procedure, not a substitute for a document to the partner.

What to watch out for

Once a period is closed and the return filed, errors are not corrected by reversals in the closed year. The rules for correcting prior-period errors apply, possibly with an amended return.

Frequent reversals on the same accounts point to poor posting templates or weak controls. They raise questions in audits and tax inspections, so the cause should be fixed, not just the consequences.