When you’ve got a problem in QuickBooks Online, the ‘easy fix’ is making a journal entry…right? As an accounting professional, you may have been trained to use journal entries liberally (I know I was), but in QBO there are some situations where journal entries help, and some where they can really mess up the books! The key is knowing which is which and what goes on inside QBO when you create journal entries to make corrections. I’ll share my tips and best practices for using journal entries in a QBO cleanup without messing up the books. Check out my video or keep reading below.
Check out my video linked below: Using journal entries in a QBO cleanup without messing up the books
Let’s start by talking about using journal entries in general. Many accountants and bookkeepers have been trained to do journal entries to fix the books. I know I was. If there was something wrong with the books, you made a journal entry, regardless of how those transactions got onto the books in the first place.
Why doesn’t that always work with QuickBooks Online? Well, QBO is really more than just an accounting and bookkeeping system or a set of books. Many clients use QuickBooks Online to manage their entire business, and need good data to be able to manage their accounts receivables, accounts payable, inventory (if they’re tracking inventory in QuickBooks), payroll, and sales taxes. Which is why you need to use journal entries with caution, and consider how those journal entries will affect all of the areas the client is managing in QBO.
Best Practices for using Journal Entries in QuickBooks Online
For following best practices, journal entries are not always the right solution, and in fact, shouldn’t be the first solution, when making corrections in QBO. Why not? Well, it’s important to keep in mind that journal entries made in QuickBooks affect both cash and accrual basis. Many transactions must be fixed at a transactional level to avoid making bigger messes. That means that many times you need to fix the transactions directly in accounts receivable, accounts payable, bank reconciliations, undeposited funds, inventory, payroll, and sales taxes.
When making corrections in QuickBooks Online, there are four basic types of corrections:
- Adjustments to transactions
- Adjustments to lists
- Adjustments to source transactions and balances
- Journal entries
Corrections in QuickBooks Online should be made in that order. First look at whether you need to make adjustments to transactions, whether there should be adjustments to any lists, next, any adjustments to source transactions or balances, and then, finally, see whether you should be adjusting using journal entries.
If you’d like to see some examples of how I work through this process of determining which type of correction is needed, click this link to watch my video, where I talk about what I consider when cleaning up accounts receivable, accounts payable, bank reconciliations, undeposited funds, inventory, payroll, and sales tax.
Journal entry, or no journal entry?
For best practices, it is important to consider the following questions:
- What happens then when we make a journal entry?
- Should we be making journal entries?
- When can we make journal entries?
Here’s my general recommendations:
- For accounts receivable, I really don’t recommend using journal entries. You should fix the source transactions first.
- For accounts payable, the same thing, I don’t recommend it, fix your source transactions.
- For bank reconciliations, you may use journal entries to write off old uncleared transactions.
- For undeposited funds, I do not recommend using journal entries. It really won’t fix the problem. It doesn’t make the problem go away at all to try to just clear out undeposited funds using a journal entry.
- For inventory, if the client is using inventory items, you should not be using journal entries, you should only be adjusting inventory (using the inventory quantity adjustment). When inventory items are not used, you may use a journal entry to adjust the ending inventory balance.
- For payroll, if you’re using QuickBooks payroll, journal entries should not be used.
- For sales tax, if you’re tracking sales tax in the sales tax center in QBO, journal entries should not be used either.
So the big takeaway, when you think about using journal entries, is to look first to see whether you need to fix a source transaction or a list item before attempting to use a journal entry in QBO. Otherwise, you may be trying to clean up the books with journal entries, but may end up messing them up even more!
Closing
I’ve just shared my recommendations for best practices when using journal entries in a QBO cleanup without messing up the books. If you’d like to learn more on QuickBooks Online cleanup topics, there is a category on this site specifically for my blog posts related to QBO Cleanup (Click here). Also, make sure to visit the QuickBooks Online cleanup & diagnosis playlist on my YouTube channel: 5 Minute Bookkeeping for even more content. While you’re there, make sure to like, comment, subscribe and share, and let me know in the comments if there are any other cleanup topics you’d like me to cover in the future.