Sometimes QuickBooks Users need to move money from one Chart of Accounts category to another, in a way that’s not possible through QuickBooks Online’s ready-made forms and features. General Journal Entries (JEs) are created on special occasions to post such transactions. For example, CPAs will use Adjusting Journal Entries to reclassify transactions that were erroneously entered throughout the year.
If there is a proper tool to achieve the transaction, please use it! Most common daily transactions have a corresponding QBO form waiting for you under the +New button. Every time you create any kind of transaction, QBO manages the accounting debits and credits for you behind the scenes. You can view them by clicking on More > Transaction Journal in the black bar at the bottom of any Journal Entry. Professionals should only use JEs under rare circumstances.
If an Income or Expense transaction was miscategorized, instead of using a Journal Entry as a band-aid, fix it! Use QuickBooks Online’s Reclassify tool in the Accountant’s Toolbox, the Briefcase at the top left of your screen.
For those of you who prefer JEs and “have always used them,” understand this: Relying on Journal Entries to manage your books has an important, unfortunate side effect in today’s modern accounting software. While the entry made sense to YOU at the time, it doesn’t make sense to your clients. When they look back at the last time they classified a transaction to remember what to do with it now, they’ll just perpetuate the same errors. In addition, a few years from now, no one will remember why the entry is there, or what you hoped to achieve.
What Journal Entries are For
The most appropriate time to use Journal Entries in QBO is when you need to move money from the Balance Sheet to the Profit and Loss Statement, or to update Equity. Here are several examples of common use:
- Depreciation. Every year your fixed assets are worth a little less, and you expense the devaluation. Make a Journal Entry to debit the Depreciation Expense and credit the Fixed Asset, so that you know what the vehicles or equipment are currently worth.
- Opening Balance Equity (OBE). OBE is created automatically when setting up bank accounts in QuickBooks Online, to store the amount of money that was already in the account as of the start date of your QBO file. The company already had that money, so the dollar amount really belongs in Retained Earnings (RE). After you’re done setting up all the bank accounts, credit cards and inventory, use a Journal Entry to debit Opening Balance Equity and credit Retained Earnings. OBE should always equal $0 when you’re done setting up your QBO file.
- Owner Distribution and Contribution Equity Accounts. On January 1st of each year, these Equity categories for personal money in and out may be zeroed out by transferring the balances to Retained Earnings. That way, when you run a year-end Balance Sheet, you can see the total personal money used that year, and that year only.
Let's use Scenario # 3 as an example.
To create a Journal Entry, select + > Journal Entry. The Journal Entry window opens.
The QBO Journal Entry window
Alicia-P_Series-3_Lesson-2_Fig_02
Enter the Date, and an ID number in the Journal no. box. This number will auto-increment, but many people enter a code that helps them identify the transaction (note, though, that because I used 2016 in this example, my next Journal no. will automatically become SC 2017, which I’ll need to change).
If the purpose of this JE is a Bookkeeper or Accountant fixing an error, they would check off Is Adjusting Journal Entry?. Since this is just a normal procedure, I’ll leave it blank. This option only appears for QuickBooks Online for Accountants (QBOA) users. There is an Adjusting Journal Entry report bookkeepers can run to identify journal entries they created, vs. the business owner.
In the first line, you’ll see I’ve entered the Equity account used to track how much personal money was spent on company business expenses that year.
In the Debits column, enter the total spent last year. On the second line, enter “Retained Earnings”, and in the Credits column, copy that same number.
In the Description line, write careful notes about the purpose of this Journal Entry. It may seem obvious to you now, but a year from now it might not. If multiple people will be looking at these records, they’ll need this information to understand your intention.
There is also a box to enter a Customer Name if the transaction is related to a customer account, and you’re doing job costing.
If you’re using Classes, enter the appropriate Class for each of the lines.
Click the Save and close button.
When you look at the Balance Sheet for last year, you’ll still see the total Owner Contribution money spent. When you look at the current year, it will start at $0 and increase throughout the year.
Follow this same procedure to zero out the Owner Draw/Shareholder Distribution account as well.
How Do the Debits and Credit Columns Work?
The trick with Journal Entries is that you have to really call on your bookkeeping and accounting skills. The fact that this topic is so confusing is one of the reasons I encourage business owners to use the actual QBO transaction forms instead of JEs.
(I joke that Debits and Credits are like your USB thumb drive. It always takes 3 tries to insert it into your computer! You try to put it in the little square slot, but it doesn’t fit. So, you flip it over, and it still won’t go in. Then you turn it back the way you first had it…and NOW it works!)
In every JE, the Debits and Credits columns must have the same total.
When you spend, receive, or move money, it has to come from somewhere and go someplace, so the amount must be the same on both sides of the equation.
On the surface, Debits and Credits are the opposite of what you would expect them to be when you look at a bank statement. For the average English speaker, debit=down and credit=up. But that doesn’t hold true in bookkeeping!
If a financial transaction results in positive cash flow, then the entry goes to the Debit column. If it results in negative cash flow, then the entry goes to the Credit column.
Debits increase assets; Credits decrease assets. Credits increase liabilities and equity; Debits decrease liabilities and equity.
Lesson Wrap-up
Journal entries give you the ability to set up opening balances for your chart of accounts, and the flexibility to manually move values around in your books. But again, if there’s a QBO feature that achieves the same goal, please use them. The Reclassify Tool turns you into a bookkeeping hero!
Are you interested in more power tools like Reclassify? If you’re used to QuickBooks Desktop, QuickBooks Online is full of hidden gems that make it a joy to use. Check out my course specifically about QBO for Accountants Tips and Tricks. Use coupon code IA10 for 10% off!
Next week feature will cover bank reconciliations, including the difference between reconciling and “reconciling,” and what to do when the beginning balance is wrong!