132
Chapter 5 Appendix
The Accounting Cycle: Adjustments
appendix 5a: correcting entries
At any time during the accounting cycle, errors in a journal entry may be discovered in the
accounting records. The error could be for the incorrect amount, or the wrong account may have
been used. In either case, a correction must be made.
In accounting systems, there must always be a paper trail to document what has happened to affect
the ledger balances. Errors should not be simply erased to be corrected. Instead, a correcting journal
entry should be made to reverse the error and make the correction. It is important to clarify that
these correcting entries are different from adjusting entries. Correcting entries can be made at any
time during the accounting cycle and are meant to fix an error in a previous journal entry.
For example, suppose an entry was made on March 1, 2016 to prepay a one-year insurance policy
for $1,800. Instead of debiting the prepaid insurance account, the prepaid rent account was debited
instead.The incorrect journal entry is shown in Figure 5A.1.
journal
Page 1
date
2016
account title and explanation
Pr debit credit
Mar 1 Prepaid Rent
1,800
Cash
1,800
Pay for one-year insurance policy
______________
FIGURE 5A.1
This journal entry will overstate prepaid rent and understate the prepaid insurance. If the error is
discovered a week later on March 8, 2016, a correction must be made. First, a reversing entry to
reverse the original transaction from March 1 and then the correct journal entry.This is shown in
Figure 5A.2.
journal
Page 2
date
2016
account title and explanation
Pr
debit
credit
Mar 8 Cash
1,800
Prepaid Rent
1,800
To reverse incorrect entry
Mar 8 Prepaid Insurance
1,800
Cash
1,800
To correctly pay for one-year insurace policy
______________
FIGURE 5A.2
After the correcting entries are made, they are posted to the appropriate general ledger accounts to
update them. At this point, the ledger account balances will be correct.
