Why Is It Important to Correct Journal Entries?
Accounting is a critical aspect of any business, as it helps in recording and tracking financial transactions accurately. While the process of recording transactions can be straightforward, it is not uncommon for errors to occur. These mistakes can have a significant impact on a company’s financial records, and if left uncorrected, can lead to inaccurate financial reporting, compliance issues, and even financial losses. One way to rectify these errors is by booking a correcting journal entry. In this blog, we will discuss how to best go about booking a correcting journal entry and why different corrections require different things.
What Is It?
A correcting journal entry is used to fix an error in previous journal entries. This must be done because in accounting you can not go back and delete a journal entry. These correcting entries must be made whenever there is a mistake found or before closing the entries. While there are two methods to book a correcting journal entry, there is also other important steps.
What To Think About
When booking a correcting journal entry, it is important to first establish what is causing this. Is this a systematic problem that we are just putting a band aid on a broken bone, or is this a systematic problem that we are fixing entirely? These two are quite different. If we are just putting a band aid on a broken bone to get financials done. Then the documentation around that correction must be well organized. Since it is something that needs to be fixed eventually it is important to know what was done in the past to truly fix it.
When it comes to the deeper systemic issue there is a little more involved. In order to fix a deeper systemic issue, you must have some plan of attack for the months following to find what is causing this issue.
If a journal entry needs to be fixed for something like inventory just to move on, then a little more documentation should be done. Documentation is key. A good way to think about documentation is that it is a summary of the journey of what was fixed. This also helps to identify what triggered the journal entry.
Accounting is such an important aspect of a company’s success and longevity. This means having a responsible and knowledgeable accounting team is crucial. For more information on how to book a correcting journal entry, or to get the best help possible, reach out to us through the link below.