Question

What is the difference between an adjusting entry and a correcting entry

Answer 1

Adjusting entries are those entries that are recorded at the end of an accounting period and just before the preparation of financial statements in order to reflect the true picture. These entries arise out of accrual basis of accounting as the income and expense accounts are adjusted to reflect all those income and expenses that have accrued but not billed or paid.

On the other hand, “Correcting entries” are those entries which are recorded to rectify any erroneous accounting entry made previously. These entries also aim to reflect true picture of financial statements, however these are made to eliminate the impact of an incorrect entry previously posted. An example would be an entry to correct revenue for previous month wherein revenue was inflated out of a mistake.