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.

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Best Practices for Correcting Entries

There are several best practices associated with the use of correcting entries, which are as follows:

Assign to experienced staff. Correcting 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.
Require an approval. 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.
Create documentation. 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.

Prepare at once. 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.
Track correcting entries. 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.

Example of a Correcting Entry

Finnegan receives a $300 supplier invoice for office supplies, and incorrectly records it as a charge to the bank fees account, using the following entry:

He realizes his mistake and subsequently creates a correcting entry to move the expense to the correct account. The entry is as follows:

By making the correcting entry, Finnegan has, in effect, altered his original entry, as though it had initially (and correctly) been entered as follows: