When several correct entries are recorded after an incorrect entry is made, the incorrect entry should be corrected by making a correcting entry. This is a journal entry that rectifies the effect of the original incorrect entry without deleting the original entry itself. The correcting entry should be made once the error is discovered and should adjust only the affected accounts, either by increasing or decreasing the balances as needed to reflect the correct amounts. There are two common ways to correct the error:
- Make a single correcting entry to offset the effects of the incorrect entry. This involves debiting the account(s) that were understated and crediting the account(s) that were overstated in the original incorrect entry.
- Reverse the incorrect entry by making a journal entry that is the exact opposite of that incorrect entry, then make a new correct entry to record the transaction properly.
Both methods keep the original entries in the ledger for audit trail purposes. The correction is documented on the date the error is found, and an explanation or annotation should be added to clarify why the correcting entry was made. For example, if an expense was incorrectly debited to one expense account instead of another, the correcting entry would credit the wrong expense account to reduce it and debit the correct expense account to increase it by the same amount. This ensures that the financial records accurately reflect the transaction despite the initial incorrect entry.
