Accountants must make correcting entries when they find errors. There are two ways to make correcting entries: reverse the incorrect entry and then use a second journal entry to record the transaction correctly, or make a single journal entry that, when combined with the original but incorrect entry, fixes the error. Show
After making a credit purchase for supplies worth $50 on April 5, suppose Mr. Green accidently credits accounts receivable instead of accounts payable.
 Mr. Green discovers the error on May 2, after receiving a bill for the supplies. He may use two entries to fix the error: one that reverses the incorrect entry by debiting accounts receivable for $50 and crediting supplies for $50, and another that records the transaction correctly by debiting supplies for $50 and crediting accounts payable for $50.
Or Mr. Green can fix the error with a single entry that debits accounts receivable for $50 and credits accounts payable for $50.
What is a Correcting Entry?A correcting entry is a journal entry that is made in order to fix an erroneous transaction that had previously been recorded in the general ledger. For example, the monthly depreciation entry might have been erroneously made to the amortization expense account. If so, the correcting entry is to move the entry to the depreciation expense account by crediting the amortization expense account and debiting the depreciation expense account. Alternatively, the original entry could have been reversed and replaced by a new entry that correctly charges the expense to the depreciation account. Best Practices for Correcting EntriesCorrecting entries are usually only made by the more experienced accounting staff, since they have a better understanding of the accounting system and the impact of making special journal entries on the financial statements. It can make sense to have the controller approve all proposed correcting entries before they are made, to ensure that a second person verifies that an entry will have the intended effect. It is especially important to fully document a correcting entry, since these items are particularly difficult to understand after some time has passed. This means attaching to each journal entry documentation of the original error, as well as notes regarding how the correcting entry is intended to fix the original error. Documentation is especially valuable if it seems likely that the company's auditors will later review a correcting entry. A correcting entry should be made as soon as an error is discovered and evaluated. Otherwise, it is quite likely that the entry will never be corrected; this is because error correction falls outside of the normal flow of transaction processing, so there is no work calendar or procedure that monitors whether these transactions are pursued. Correcting entries are very time consuming. Consequently, it can make sense to track the number of correcting entries made by month, to see if the underlying issues causing these entries have been resolved. If so, there will be less need for correcting entries, and the accounting staff will have more time available for other duties. Even with automation and easy-to-use accounting tools, bookkeeping mistakes can happen. Journal entry errors can end up costing your small business time and money. Learn how to get your books back on track with correcting entries. What is a correcting entry?A correcting entry in accounting fixes a mistake posted in your books. For example, you might enter the wrong amount for a transaction or post an entry in the wrong account. You must make correcting journal entries as soon as you find an error. Correcting entries ensure that your financial records are accurate. With correcting entries, you adjust the beginning of an accounting period’s retained earnings. Retained earnings include your take-home money after paying expenses for the period. These kinds of entries are called prior period adjustments. Accrual accounting and double-entry recordkeepingCorrecting entries occur with accrual accounting. The accrual method of accounting uses double-entry bookkeeping. For every transaction your business makes, you must make debit and credit entries. Some accounts increase with a debit, while others increase with a credit. And, some accounts decrease with a debit, while others decrease with a credit. Debit and credit entries are equal but opposite. The total debits and credits in your books should equal each other. Unequal debits and credits are a good indication that there is a mistake in your records. Use debits and credits for correcting journal entries. Patriot’s accounting software makes it easy to manage your books!
How to rectify errors in accountingSometimes, mistakes happen in your accounting records that need to be corrected. You need to identify several details before making a correcting entry, including the type of mistake and the number of accounting periods it affects. Some accounting errors do not require a correcting entry because they are counterbalanced. A counterbalancing error happens when one mistake cancels out another mistake. You must make a correcting entry if you discover you’ve made a categorizing or mathematical error. If you originally posted to the wrong account, you might need to adjust the entire entry. Or, you might have to make a minor adjustment. If you need to make a correcting entry, do the following:
You must make new entries for the correction. Use the same accounts as the original posting for the correcting entry. Accounting error correction entriesDepending on the kind of error, you will use one of the following methods to correct it:
Usually, adjustments can be made when you record the wrong amount. Reversals are often used when you record an entry in the wrong account. Correcting entries with adjustmentsTo adjust an entry, find the difference between the correct amount and the error posted in your books. Enter the difference (adjustment amount) in the correct account(s). If the original entry was too low, increase an account. If the original entry was too high, decrease an account. Correcting entries with reversalsReversal entries cancel out the original erroneous postings. You then create new entries with the correct information. To reverse an entry, credit the account that received the debit in the original entry. And, debit the account that received the credit. Use the same amounts as the original entries. Correcting journal entry examplesTake a look at these correcting journal entry examples. Example 1: Making adjustmentsLet’s say you collected $200 on a receivable from a customer. You should debit the cash account (increasing it) and credit the accounts receivable (decreasing it). Your journal should look like this:
But, you enter $150 instead of $200, so your journal is actually recorded like this:
To fix the entries, find the difference between the correct amount and the mistaken entry. In this example, the difference is $50. Debit the additional $50 to the cash account and credit $50 to the accounts receivable account.
The correcting entries combined with the original erroneous entries reflect the correct amount ($150 + $50 = $200). Example 2: Reversing entriesLet’s say you bought a new piece of equipment for $2,000. You should debit the equipment expense account $2,000 (increasing it) and credit the cash account $2,000 (decreasing it). Your journal should look like this:
But, you make an entry in the tax expense account instead of the equipment expense account. Your journal is actually recorded like this:
Again, you need to correct the mistake in your books. To fix the entries, you must offset the original general ledger entries. The equipment expense account is lower than it should be, so you need to increase it with a debit. The tax expense account is higher than it should be, so you need to decrease it with a credit. The cash account is not affected. Here is what the correcting entries look like:
Now, your books reflect the amount spent on the correct expense account. Need a simple way to keep accurate books? Patriot’s online accounting software is easy to use and made for the non-accountant. We offer free, U.S.-based support. Try it for free today. This article has been updated from its original publication date of October 31, 2017. This is not intended as legal advice; for more information, please click here. When an incorrect entry has been journalized and posted?Accounting 1. What are the three steps for correcting an incorrect amount posted to an account?What are the three steps for correcting an incorrect amount posted to an account? (1)Draw a line through the incorrect amount. (2)Write the correct amount just above the correction in the same space. (3)Recalculate the account balance.
When adding a new expense account between accounts numbered 510 and 520 the new account is assigned the account number 515?When adding a new expense account between accounts numbered 510 and 520, the new account is assigned the account number 515. The totals of general amount columns in a journal are not posted. If both amounts on a journal line are recorded in special amount columns, (A) only one of the amounts is posted individually.
When posting to the general ledger accounts the information in the post Ref column of the journal refers to?Step 1. When posting to the general ledger accounts, the information in the Post. Ref. Column of each ledger account refers to the account number.
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When an amount is journalized and posted to an incorrect expense account Why is the amount of the correcting entry debited to the correct expense account?
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