Question

1. How would you define ethics? What are three factors that might affect good ethical conduct? Conduct research and provide an explanation of why the Sarbanes-Oxley Act was created and how it relates to ethics. What are the legal liabilities of an accountant?
2. The accounting equation is foundation of accounting. Understanding debits/credits and the account normal balances are just as important. Sometimes, these concepts are difficult to understand and/or remember. Please research the Internet to find fun and easy ways to remember this information. It could be a song, a mnemonic, phrase, video, etc. It can even be something that you have created. Make sure that the information is college appropriate. Please post your findings and include a link that references the material. Then in a minimum of a paragraph, summarize why you choose this source, how it has helped you remember the material, and why other students would find it helpful.
3. Assume that you are the president of your company and paid a year-end bonus according to the amount of net income earned during the year. When prices are rising, would you choose a FIFO or weighted average cost flow assumption? Explain, using an example to support your answer. Would your choice be the same if prices were falling?

Answer 1

What is a correcting entry?

A correcting entry in accounting fixes a mistake posted in your books. For example, you might enter the wrong amount for a transaction or post an entry in the wrong account. You must make correcting journal entries as soon as you find an error. Correcting entries ensure that your financial records are accurate.

With correcting entries, you adjust the beginning of an accounting period’s retained earnings. Retained earningsinclude your take-home money after paying expenses for the period. These kinds of entries are called prior period adjustments.

Accrual accounting and double-entry recordkeeping

Correcting entries occur with accrual accounting. The accrual method of accounting uses double-entry bookkeeping.

For every transaction your business makes, you must make debit and credit entries. Some accounts increase with a debit, while others increase with a credit. And, some accounts decrease with a debit, while others decrease with a credit.

Debit and credit entries are equal but opposite. The total debits and credits in your books should be equal to each other. Unequal debits and credits are a good indication that there is a mistake in your records. Use debits and credits for correcting journal entries.

How to rectify errors in accounting

Sometimes, mistakes happen in your accounting records that need to be corrected. You need to identify several details before making a correcting entry, including the type of mistake and the number of accounting periods it affects.

Some accounting errors do not require a correcting entry because they are counterbalanced. A counterbalancing error happens when one mistake cancels out another mistake.

You must make a correcting entry if you discover you’ve made a categorizing or mathematical error. If you originally posted to the wrong account, you might need to adjust the entire entry. Or, you might have to make a minor adjustment.

If you need to make a correcting entry, do the following:

• Find out all the accounts that are affected by the error.
• Determine the amount that needs to be adjusted.

You must make new entries for the correction. Use the same accounts as the original posting for the correcting entry.

Accounting error correction entries

Depending on the kind of error, you will use one of the following methods to correct it:

1. Make a single journal entry that fixes the error when combined with the incorrect entry
2. Reverse the incorrect entry and use a second entry to record the transaction

Usually, adjustments can be made when you record the wrong amount. Reversals are often used when you record an entry in the wrong account.

Correcting entries with adjustments

To adjust an entry, find the difference between the correct amount and the error posted in your books. Enter the difference (adjustment amount) in the correct account(s).

If the original entry was too low, increase an account. If the original entry was too high, decrease an account.

Correcting entries with reversals

Reversal entries cancel out the original erroneous postings. You then create new entries with the correct information.

To reverse an entry, credit the account that received the debit in the original entry. And, debit the account that received the credit. Use the same amounts as the original entries.

Correcting journal entry examples

Take a look at these correcting journal entry examples.

Example 1: Making adjustments

Let’s say you collected $200 on a receivable from a customer. You should debit the cash account (increasing it) and credit the accounts receivable (decreasing it). Your journal should look like this:

Account	Debit	Credit
Cash	$200
Accounts Receivable		$200

But, you enter $150 instead of $200, so your journal is actually recorded like this:

Account	Debit	Credit
Cash	$150
Accounts Receivable		$150

To fix the entries, find the difference between the correct amount and the mistaken entry. In this example, the difference is $50. Debit the additional $50 to the cash account and credit $50 to the accounts receivable account.

Account	Debit	Credit
Cash	$50
Accounts Receivable		$50

The correcting entries combined with the original erroneous entries reflect the correct amount ($150 + $50 = $200).

Example 2: Reversing entries

Let’s say you bought a new piece of equipment for $2,000. You should debit the equipment expense account $2,000 (increasing it) and credit the cash account $2,000 (decreasing it). Your journal should look like this:

Account	Debit	Credit
Equipment Expense	$2,000
Cash		$2,000

But, you make an entry in the tax expense account instead of the equipment expense account. Your journal is actually recorded like this:

Account	Debit	Credit
Tax Expense	$2,000
Cash		$2,000

Again, you need to correct the mistake in your books. To fix the entries, you must offset the original general ledger entries.

The equipment expense account is lower than it should be, so you need to increase it with a debit. The tax expense account is higher than it should be, so you need to decrease it with a credit. The cash account is not affected. Here is what the correcting entries look like:

Account	Debit	Credit
Equipment Expense	$2,000
Tax Expense		$2,000

Now, your books reflect the amount spent on the correct expense account.

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