Adjusting Journal Entries explained

Lynn Talbott is here to demystify the world of adjusting journal entries in Quickbooks.

Quickbooks allows you to adjust items that you cannot get into Quickbooks transactionally. Most journal entries, AKA, JE’s, are “adjusting” because they are taking a transaction and moving it to the proper chart of accounts.  I know they may seem complicated at first glance with all that accounting jargon being tossed around! But have no fear - I will break down the basics so you feel like a rockstar.

Let's start with why journal entries exist at all. Essentially, they allow us to record important financial transactions that impact the books without exchanging money. Typical examples are deprecation and accruals - tracking expenses incurred but not yet paid.

CPAs tend to love journal entries as it gives them granular control to align the books with tax filings. If you do not see any JEs inside your clients’ files, (or your QB file) then the books have not been adjusted to reflect how the taxes were filed.  It is likely that there is some depreciation, maybe some movement to owner equity, health insurance pulled out for the owner, and the like.  That year-end flurry of closing journal entries is actually the accountant making tweaks so the year-end Quickbooks reports match what gets reported to the IRS. You can learn a lot from reviewing these entries. 

Now, you may be wondering how I make sense of these. I'm glad you asked!

Purpose of Adjusting Entries: Adjusting entries are made at the end of an accounting period (e.g., month, quarter, or year) to record transactions that have occurred but have not yet been captured in the general ledger. They are necessary to match revenues and expenses to the periods in which they are earned or incurred in accordance with the accrual accounting method.

Types of Adjusting Entries: There are four main types of adjusting entries:

1)      Accrued Revenues: These entries recognize revenue earned but not yet received in cash or recorded.

2)      Accrued Expenses: These entries recognize expenses incurred but not yet paid or recorded. Common examples include salaries or interest owed but not yet paid.

3)      Prepaid Expenses: Adjusting entries for prepaid expenses involves recognizing the portion of a prepaid expense that has been consumed. This reduces the asset and records an expense. For example, you paid workers comp for the whole year but want to portion the amount out each month.

4)      Unearned Revenues: Unearned revenue entries reduce the liability and recognize the revenue as it is earned over time, such as subscription services.

Depreciation expenses: Where you decrease the book value of an asset and increase the depreciation expense. Debit the Expense on the Profit and Loss and Credit the Accumulated Depreciation on the Balance Sheet.

Purchase of an Asset with a loan: Debit the newly created Asset and Credit the newly created Loan on the Loan Liability.

Documentation: Adjusting entries should be properly documented with clear explanations of why they are necessary. If the CPA sends you the Closing entries, you should attach them to the JE and write on each line “per CPA”. There is nothing worse than opening up a JE in a client file that has no notes or attachments and the JE does not make sense to you or the client.

Reversal in the Next Period: Some adjusting entries may be reversed in the following accounting period if they relate to temporary items, such as accruals or deferrals, which will be resolved in the next accounting period.  Quickbooks allows you to reverse it easily by clicking the tab “reverse” at the bottom of the page.  It places an “R” on the journal entry so that everyone knows it is reversing a prior JE.

Let me know what still feels fuzzy or if you have an example I can help explain! Here to guide you every step as you master the art of adjusting entries.

 

You are capable beyond measure! Joining our community support group will give you the mindset and skills you need to be successful.”   - Lynn Talbott

Lynn Talbott, Bookkeeping coach, and mentor to independent bookkeepers

www.coachingbookkeepers.com