Provide an example distinguishing a correcting entry from an adjusting entry.

• A. Correcting entry records depreciation; adjusting entry records cash receipts.
• B. Correcting entry is never used; adjusting entry covers all corrections.
• C. Correcting entry fixes an error such as a misposted amount; adjusting entry records accruals/deferrals such as accrual revenue.
• D. Correcting entry records opening balance; adjusting entry records closing balance.

Answer: (C)

This question tests how correcting entries differ from adjusting entries and when each is used. A correcting entry is used to fix mistakes already recorded in the books. It corrects errors such as posting a transaction to the wrong account or for the wrong amount, to put the financials back on the right track. For example, if a cash receipt was mistakenly recorded as revenue, you would correct by debiting Cash and crediting Revenue for the amount involved, moving the funds to the proper cash account and removing the improper revenue entry.

An adjusting entry, by contrast, is made at the end of a period to recognize revenues earned or expenses incurred that haven’t yet been recorded, ensuring the statements reflect accruals and deferrals appropriately. A common example is accrual revenue: if services have been performed but haven’t yet been billed or recorded, you would record an adjusting entry to recognize revenue by debiting Accounts Receivable and crediting Revenue. This aligns income with the period it was earned, even if cash hasn’t moved yet.

The other choices mix up these roles: correcting entries don’t relate to depreciation or cash receipts in the way described; correcting entries are indeed used, not never used; and adjusting entries aren’t simply about opening or closing balances.