Should I Correct a Journal Entry That Was Made in a Previous Year

by Marie | Oct 4, 2016 | Adjustments & Corrections, Bookkeeping 101

It is never a good idea to make changes to past accounting periods that you have already filed tax returns for. However, if you must, you need to ensure that the changes you are about to make will not throw off the previous years balance making them out of synch with your latest tax return numbers. Thus if you are correcting it to make it synchronize with your tax return, then by all means you should go right ahead. It simply means your tax preparer made the corrections when filing the tax return but the correction just hasn’t been entered in QuickBooks as yet.

Also, bear in mind that depending on the type of journal entry you are correcting, and the accounts it affects, it may be worth making a new journal in the current year to offset that journal or the parts of it that needs correction.

The fact that you need to correct it means it is incorrect, but if the period is closed by someone else and password protected, making a new one in the current year may be the only option you have.

How to Correct an Error in Revenue or Expenses Made in the Last Tax Year, but Not Discovered Until Current Tax Year

At year-end, net income is closed out to Income Summary, which is then transferred to the owners’ equity account Retained Earnings (corporations) or Capital (partnerships, sole proprietorships). Thus, this account includes last year’s net revenues and expenses. To add back omitted revenues, you credit Retained Earnings or Capital and to add back expenses, you debit one of these accounts. Here are a few pointers with examples:

• To correct an expense omitted or understated in 2015 after the books are closed, debit Retained Earnings (or Capital) to reduce the balance.
• To correct an expense overstated in 2015 after the books are closed, credit Retained Earnings (or Capital) to increase the balance.
• To correct revenue omitted or understated in 2015 after the books are closed, credit Retained Earnings (or Capital) to increase the balance.
• To correct revenue overstated in 2015 after the books are closed, debit Retained Earnings (or Capital) to reduce the balance.

As usual, it’s always a good idea to consult with your tax preparer/CPA to ensure you are both on the same page with the books. Some changes made after a period’s tax return is filed, may need to be handled with the filing of an amended tax return.