Correcting Entry

What is Correcting Entry?

Correcting entries in accounting is used to rectify the mistakes made while recording the financial transactions in the books of accounts of the business. These incorrect entries can be located while preparing the trial balance when the debits and credits total do not match or while reconciling the balances with the parties to which such balance relates. Even some organizations establish a routine system to verify the accounting entries made in the business.

Steps

To pass the entries, the following steps can be used by the concerned person:

Correcting-Entry

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Step 1: First of all, one has to identify the wrong entry or the erroneous entry made in the books of accounts.

Step 2: In the next step, one has to determine the correct entry required to be made. So, the accountants must find the erroneous entries first, and as soon as they find it, they should make the rectified entry for the same.

Step 3: Lastly, the correcting entry is to be passed. There are two ways to pass:

  • Way 1: Pass a reversal entry by making the second journal entry to rectify the erroneous one. After that, pass the required entry.
  • Way 2: Pass the single journal entry, which will rectify the wrong entry, and consider the effect of the new entry required to be made.

Examples

For example, Suppose, Mr.Eden has a business of jewelry trading. On April 5th, 2019, he purchased jewelry worth $20,000 from Mr. Y. On the day of purchase, the entry made by Mr. Edward was

Correcting Entry Example1

On 3rd May 2019, while tallying the amount payable to Mr. X, it was found that the amount payable to Mr. X is not correct, so Mr. Eden tries to locate the error. Therefore, he found that instead of Mr. Y, the accountant wrongly credited Mr. X, so to rectify the error, Mr. Eden’s accountant made the following entries:

Example1.2
Correcting Entry Example1.3

Instead of the above two entries, Mr. Eden accountant could have done the below single entry:

Example1.4

Correcting Entry for Cash

When cash is involved in the wrong entry, it can be rectified, either bypassing the reversal of the first entry and then recording the correct entry. The same can be rectified by passing the single entry to consider a reversal of wrong entry and correct entry.

An example considering passing of the single entry to consider the reversal of wrong entry and correct entry:

Mr. Paul purchased Machinery for $200,000 and wrongly debited the Furniture account. So, for that, we need to pass journal entry as below:

Mr. Paul recorded the purchase of Machinery of $200,000 wrongly to the account of Furniture.

Wrong Entry in Books of Mr. Paul

Example 1

Correcting Entry

Example 2

Correcting Entries with Reversals

One way to rectify the erroneous entry is to pass a reversal entry by making the second journal entry to rectify the erroneous one and pass the rectified entry.

For example – Mr. Paul purchased Machinery for $200,000 and wrongly debited the Furniture account. So, for that, we need to pass journal entry as below:-

Mr. Paul recorded the purchase of Machinery of $200,000 wrongly to the account of Furniture.

Correcting Entries with Reversals 1

Passing the Reverse Entry to Correct the Effect of Wrong Entry

Correcting Entries with Reversals 2

Passing the Correct Entry

Correcting Entries with Reversals 3

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This has been a guide to what is Correcting Entry. Here we discuss steps, journal entries examples, and how to correct entries for cash and reversal. You may learn more about financing from the following articles –