What Does Reclass Mean in Accounting?
Learn how reclassification adjusts financial data by moving a value to its proper account, a key process for ensuring accurate and useful reporting.
In accounting, a reclassification, or “reclass,” is the process of moving a financial amount from one general ledger account to another. The goal is to ensure that transactions are properly categorized within a company’s accounting system. This correct categorization is necessary for producing accurate financial statements, like the balance sheet and income statement, which communicate a company’s financial health to investors and management.
Core Purpose of Reclassification
The primary driver behind a reclassification is the need for accuracy in financial reporting. One of the most frequent reasons for a reclass is to correct an initial mistake. For instance, an invoice for computer software might be accidentally coded to the “Office Supplies” expense account instead of the “Software Expense” account. A reclassification entry fixes this error, ensuring expenses are tracked correctly.
Another purpose is to improve the usefulness of financial statements for analysis. A company might initially record all revenue in a single account. To gain better insight, it could reclassify revenue into more specific categories, such as “New Product Revenue” and “Service Revenue,” which provides a more granular view for management decisions.
A reclass is also necessary when the intended use of an asset or liability changes. An asset’s classification is based on its purpose within the business. If a company decides to sell a piece of machinery previously used in production, its classification must change. This reflects the shift in management’s intent and distinguishes assets for sale from those used in operations.
Common Reclassification Scenarios
A common reclassification occurs with long-term debt. When a company has a loan that extends beyond one year, it is classified as a long-term liability on the balance sheet. However, the portion of that loan principal due within the next 12 months must be shown as a current liability. An accountant will make an entry to move this amount from “Long-Term Debt” to “Current Portion of Long-Term Debt.”
Correcting expense miscategorization is another common scenario. For example, a marketing department purchases a $2,000 subscription for a CRM tool, but the invoice is mistakenly recorded in the “General Office Expenses” account. An accountant reclassifies the $2,000 to “Sales and Marketing Technology Expense” to ensure the budget and spending are accurately tracked.
A reclassification happens when a company decides to sell a major fixed asset, like a building. Under U.S. Generally Accepted Accounting Principles (GAAP), once an asset is actively marketed for sale at a reasonable price, it must be reclassified. The asset’s value is moved from “Property, Plant, and Equipment” to an “Assets Held for Sale” account, signaling that it is no longer part of productive operations.
The Reclassification Journal Entry
The mechanics of a reclass are executed through a journal entry, which always involves at least two accounts. Using the expense miscategorization example, an accountant records a journal entry to correct the $2,000 CRM software purchase. The entry debits the “Sales and Marketing Technology Expense” account for $2,000 and credits the “General Office Expenses” account for the same amount.
A reclassification entry does not change the company’s overall financial position. In this case, total expenses remain the same; only the specific categories have been adjusted. The entry shifts value between two expense accounts, having no net impact on profitability or the accounting equation (Assets = Liabilities + Equity).
To maintain a clear accounting record, every reclassification journal entry must include a detailed description or memo. This memo explains why the entry was made, referencing the original transaction if possible. For example, the description might read: “To reclassify CRM software subscription from Office Expenses to Sales and Marketing Technology per invoice #7894.” This documentation provides a clear audit trail for internal reviews and external audits.