When the company financial team or accountant conducts a financial recording process, it is not infrequent to encounter financial recording errors. To fix the error, they can’t fix it right away using a correction pen. But they had to correct the mistake by compiling the correcting entries. So, what is correcting entries? Check out this article to know the correcting entries, including definitions, benefits, and examples!
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Correcting Entries Definition
Correction entries is a journal or entry that is specifically compiled to fix the errors in a financial statement. In this case, the error is when classifying an account or when recording the transaction value. When doing a financial record, fixing the mistake using a correction pen is not recommended. This is feared to trigger doubts from various parties so that the company economic team or accountant must correct the error by compiling the correcting entries.
Benefits of Compiling Correcting Entries
The users of correcting entries will obtain various benefits. With the correcting entries, accountants will be able to find out the company’s transaction history. Not only that, but this can also make the accountant’s work more structured and systematic. No less critical, correcting entries can also train how to fix an error correction. Later on, there will be no confusion in the financial recording.
Speaking of error forms, two types are identified as errors. Here are the error forms:
- Firstly, Errors in the current period, where this error occurs when classifying accounts or when summing.
- Secondly, Errors in different periods where mistakes that occurred in the previous period can be carried over to the next period if the error affects the income statement. As for errors that affect the income statement, the account becomes zero at the end of the period and will not be carried away to the next period.
How to Compile Correcting Entries?
According to Cliffs Notes, there are two ways to compile 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 access, will fix the error.
Distinctions between Correcting and Adjusting Entries
Both correcting and adjusting entries have several distinctions. The main difference between these entries can be seen from the purpose of compiling them. Correcting entries are made to correct the error transaction value and to make corrections to the use of incorrect account classification. Meanwhile, adjusting entries are made to provide the latest accounting data that is more accurate.
For another distinction can be viewed through the compiling time. Correcting entries are only required when there is an error in the account. Meanwhile, the adjusting entries are made at the end of the accounting period to compare the expenses and income.
Case Study Examples of Correcting Entries
To better understand-correcting entries, you should know the case study examples of correcting entries. Here are the case study examples of these entries:
If you earn $ 200,000 on receivables from customers, you must debit the cash account and credit the accounts receivables. But, you recorded it at $ 150,000, which should be $ 200,000. Here are the correct entries:
Because of the recording error to $ 150,000, the entries become like this:
When you want to correct the incorrect entries, you should look for the difference between the correct number and the wrong entries. In this case, the difference is $ 50,000. So the debit of $ 50,000 must be in a cash account, and the credit of $ 50,000 must be in the receivable account. The entries will look like this:
Turning over an entries
When you purchase new equipment for $ 2,000,000, you must debit the equipment expenditure account of $ 2,000,000 and credit the cash of $ 2,000,000. But you make those entries on a tax expense account, not in an equipment expenditure account. The entries should be like this:
Due to an error, the entries become like this:
Therefore, you must make corrections to errors that occur in financial records. The equipment expense account is lower than it should be, so you should add it with a debit. Meanwhile, the tax expense account is higher than it should be, so you should reduce it with a credit. In this case, the cash account is not affected. So, the correcting entries will be like this:
In conclusion, compiling correcting entries is very important if the company accountant or financial team finds errors in financial records. The users of correcting entries will obtain various benefits. One of them is making the company accountant or financial teamwork more structured and systematic.
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