What are Adjusting Entries?

An adjusting entry is used at the end of a reporting period to bring a company’s financial statements into compliance with the applicable accounting framework, such as GAAP or IFRS. For example, adjusting entries may be used to record received inventory for which no supplier invoice has yet been received. Or, they may be used to record revenue that has been earned but not yet billed to the customer. There are four types of adjusting entries, which are as follows:

Revenue accruals. The entry recognizes revenue that has been earned, but not yet billed to the customer.
Revenue deferrals. The entry shifts the recognition of billed revenue to a later reporting period, because it has not yet been earned.
Expense accruals. The entry recognizes expenses have been incurred, but for which no supplier invoice has yet been received.
Expense deferrals. The entry shifts the recognition of expenses into a later period, because it has not yet been incurred. This usually means that a supplier invoice is recorded as a prepaid expense.

What are Correcting Entries?

Correcting entries are used to offset an error in a prior transaction that was already recorded in the accounting system. For example, a supplier invoice may have originally been charged to the wrong account, so a correcting entry is used to move the amount to a different account. As another example, the original amount of the entry might have been incorrect, in which case a correcting entry is used to adjust the amount.

Comparing Adjusting Entries and Correcting Entries

There are several differences between adjusting entries and correcting entries, which are as follows:

Purpose. Adjusting entries bring financial statements into compliance with accounting frameworks, while correcting entries fix mistakes in accounting entries.
Timing. Adjusting entries are made at the end of a reporting period, while correcting entries are made whenever an error is detected.
Impact on financial statements. Adjusting entries ensure the accurate matching of revenues and expenses (as per the matching principle), while correcting entries prevent inaccurate financial statements by fixing mistakes.