Journal Entries are simple yet powerful means of adjusting your financial accounts. You will normally use other methods to affect your accounts, such as entering a check payment or issuing a refund. There are generally two main reasons to use journal entries in your QuickBooks file:
- When a financial transaction must be created and the amounts are allocated directly to the accounts you want to affect or adjust. Instead of using a function of the QuickBooks software such as check payment, bill entry, credit memo/refund, etc., a journal entry cuts to the chase and allows you to specifically choose the exact accounts you want to apply the adjustments to.
** An important consideration to make here is whether or not you want to be able to track a specific transaction in relation to this adjustment. For instance, you would not make a journal entry to increase your bank account and reduce accounts receivable when you receive an Invoice payment from a customer. Instead, you would Receive Payment against the related Invoice, and QuickBooks would adjust the related accounts accordingly. It is usually best practice to make adjustments through the various QuickBooks functions rather than making journal entries.
- When your accountant (CPA) is trying to close your books for a period of time (such as your fiscal or tax year), he will make these entries to catch your books up to the exact totals that your Chart of Accounts should be reflecting. These entries by your CPA are usually referred to as adjusting journal entries, and they are generally made for Profit & Loss and Balance Sheet purposes. One very popular such entry is for depreciation of a fixed asset. In this transaction, no monies may have actually been exchanged , but the CPA is simply moving a portion of a capitalized asset (from your Balance Sheet) into an expense account (to you Profit & Loss Statement).
It is imperative to understand exactly how debits & credits effect your accounts before making journal entries. In accounting, assets and expenses (including COGS) are increased with debits, while income, equity and liabilities are increased with credits.
The beauty of journal entries is that it is exact math. Both the total debits and credits from one single journal entry must equal each other in order for this action to be true. QuickBooks will NOT allow you to enter any transaction in any company file that is not balanced on both sides (debits equal credits).
Again, I give a word of caution to be extremely careful when using journal entries when adjusting accounts receivable (assets), accounts payable (liabilities), and undeposited funds (assets). There are almost always additional actions to take in your QuickBooks file after using journal entries to adjust these three accounts. (You will need to address the related Invoices that you did not Receive Payment against, Bills that you did not apply a check to, etc.). Otherwise, the internal reporting for your receivables, payables, and cash assets may never be accurate.
Note: AccuraBooks is a bookkeeping firm only, so please consult with your Certified Public Accountant for verification and clarification about the contents of this article.