Reversals are used to undo a transaction, such as a payment or draw, effectively erasing its impact on the account as if it never occurred. This includes recalculating interest and fees retroactively to reflect the reversal, ensuring the financial records are accurate and consistent. For example, a payment reversal undoes a payment and adjusts interest calculations as if the payment was never made, while a draw reversal cancels a draw and recalculates balances accordingly.
Unlike refunds, which simply reduce the principal balance without retroactive adjustments, reversals involve recalculating interest and fees to "backdate" the reversal's impact. This distinction ensures reversals maintain the integrity of the account's financial history, while refunds provide a straightforward reduction in principal without altering past calculations. Reversals are critical for correcting errors, handling disputes, or addressing fraudulent activity, ensuring transparency and accuracy in financial operations.