Corrections, closing, and post-closing controls

Learning goals

• Correct journal or posting errors without destroying the audit trail.
• Distinguish correcting, adjusting, reversing, and closing entries.
• Close revenue, expense, and dividend/distribution accounts.
• Prepare and interpret a post-closing trial balance.
• Use reconciliations and control accounts to detect errors a trial balance misses.

Prerequisite check

1. Why is a balanced trial balance not proof of accuracy?
2. Which accounts should carry balances into the next year: Cash, Revenue, Wages Expense, Accounts Payable, Dividends?

Vocabulary

• Correcting entry: fixes a recorded error while preserving an audit trail.
• Closing entry: transfers temporary-account results to retained earnings/owner capital.
• Temporary account: revenue, expense, and dividend/distribution account reset for a new period.
• Permanent account: asset, liability, and equity account carried forward.
• Reversing entry: optional next-period reversal of selected accruals to simplify routine processing.
• Control account: general-ledger total supported by a subsidiary ledger, such as Accounts Receivable.
• Reconciliation: comparison of independent records with explanations for differences.

Core idea

Period-end work has different purposes:

• Correct what was recorded wrongly.
• Adjust for unrecorded period effects.
• Close temporary accounts after adjusted statements are prepared.
• Reverse selected accruals on day one of the next period when the accounting system uses that procedure.

Never erase history merely to make totals agree. A reviewer should be able to see the original evidence, error, authorization, correction, and final balance.

Why this treatment makes sense

Statements cover a defined period, so revenue and expense accounts must start the next period at zero. Assets and obligations continue, so permanent accounts remain. Controls are layered: debit-credit equality detects some arithmetic errors; subsidiary-ledger agreement, bank reconciliation, invoice sequences, cut-off tests, and review detect different risks.

A repeatable method

For errors use RECORDED–RIGHT–DIFFERENCE–DOCUMENT:

1. Write exactly what was recorded.
2. Write what should have been recorded.
3. Enter only the difference needed to reach the right balances.
4. Document the source, explanation, date, preparer, and approval.

For closing use REID: close Revenue, Expenses, Income Summary (if used), then Dividends/distributions.

Worked example

Three errors are found at Pine Bay Services' December 31:

1. A $2,400 annual insurance payment was Dr Repairs Expense / Cr Cash.
2. A $1,800 collection of an existing receivable was Dr Cash / Cr Service Revenue.
3. Equipment costing $7,300 cash was Dr Supplies / Cr Cash.

Correcting entries:

Assume adjusted Revenue is $48,000; Wages Expense $20,000; Rent $7,200; Supplies Expense $3,400; Depreciation $2,000; Insurance $1,000; and Dividends $2,500. Net income is $48,000 − $33,600 = $14,400.

One common closing route is:

1. Dr Revenue $48,000 / Cr Income Summary $48,000.
2. Dr Income Summary $33,600 / Cr each expense for its balance.
3. Dr Income Summary $14,400 / Cr Retained Earnings $14,400.
4. Dr Retained Earnings $2,500 / Cr Dividends $2,500.

Some systems close directly to retained earnings. Follow the institution's method; the economic result is the same. Revenue, expenses, dividends, and Income Summary end at zero; retained earnings rises net $11,900.

Journal, ledger, and statement connection

Corrections must be posted before the adjusted trial balance and statements. Closing happens after statements: it does not change the year's reported net income. The post-closing trial balance contains only assets, liabilities, and equity. Next period's revenue and expenses can then measure that period alone.

Common mistakes

• Reversing a correct entry and then forgetting the correct replacement.
• “Fixing” a $400 error with an unexplained plug to Miscellaneous Expense.
• Closing an asset, liability, Common Shares, or ending Retained Earnings.
• Closing before adjustments or using unadjusted balances.
• Treating a reversing entry as mandatory or reversing depreciation.
• Confusing an A/R control-account difference with a trial-balance difference.

Guided practice

Correct these independent errors:

1. $960 cash rent was posted as Dr Rent Expense $690 / Cr Cash $960.
2. A $4,100 credit sale was omitted entirely.
3. $750 received in advance was Dr Cash / Cr Service Revenue; nothing is earned.
4. The correct entry Dr Supplies $1,250 / Cr A/P $1,250 was journalized but the credit was posted to A/P as $1,520.

Then say which error(s) leave the original trial balance equal.

Independent practice

Fogline Foods has adjusted balances: Sales Revenue $82,000; Cost of Goods Sold $41,000; Wages Expense $15,000; Rent Expense $6,000; Utilities Expense $2,400; Depreciation Expense $3,600; Income Tax Expense $2,000; Dividends $4,000; and opening Retained Earnings $27,000. Prepare closing entries using Income Summary, compute ending Retained Earnings, list the kinds of accounts in a post-closing trial balance, and name two controls that would detect an omitted customer invoice.

Self-check and solutions

Guided: (1) debit Rent Expense $270 to complete its debit; investigate and document how the one-sided posting occurred. (2) Dr A/R $4,100 / Cr Revenue $4,100. (3) Dr Revenue $750 / Cr Unearned Revenue $750. (4) reduce A/P by $270 with a debit-side posting correction linked to the journal; do not alter the correct journal amount. Errors 2 and 3 keep debits equal credits; the mispostings in 1 and 4 create differences.

Independent: Expenses total $70,000, so net income is $12,000. Close Sales to Income Summary $82,000; close the seven expenses to Income Summary $70,000; close Income Summary credit balance $12,000 to Retained Earnings; close Dividends $4,000 to Retained Earnings. Ending Retained Earnings = $27,000 + $12,000 − $4,000 = $35,000. The post-closing trial balance contains asset, contra-asset, liability, contributed-capital, and retained-earnings accounts. Invoice-number sequence review and shipping/work-completion-to-billing cut-off testing can find omitted invoices; an A/R subsidiary reconciliation cannot find an invoice omitted from both records by itself.

Retrieval practice

1. Which accounts are temporary, and why?
2. State the four-step correction method.
3. When is a post-closing trial balance prepared?
4. Name one balanced error and one unbalanced error.

Exam-style application

The post-closing trial balance includes Consulting Revenue $9,000 Cr and Wages Expense $5,500 Dr. Retained Earnings is $23,000 Cr. Explain what failed and show the remaining closing effect assuming those are the only temporary balances.

Target: Closing was incomplete. Close Revenue to Income Summary $9,000, expenses to Income Summary $5,500, then close $3,500 net income to Retained Earnings. Retained Earnings becomes $26,500 Cr, and both temporary accounts become zero.

Lesson summary

Corrections preserve evidence, adjustments complete the period, closing resets temporary accounts, and layered controls test different failure modes. Agreement is a clue; traceability is the stronger control.