As Accountants we default to the tried and true – the journal entry – we use the traditional system of accounting to record, adjust and correct all things. A debit here, a credit there and voila, we are done.
Not so in QuickBooks – Journal entries do not use “Items” and items are the backbone of all the subsidiary reports in QuickBooks®. When you run job profitability reports, the costs recorded by journal entries do not show up on the Profit & Loss by Job reports. This holds true for any item-based reports in QuickBooks.
QuickBooks likes to have all transactions start with the source document – a Sales Receipt, an Invoice, a Credit Memo, a Payment Receipt, a Deposit, a Bill, a Credit, a Bill Payment, a Check, a Credit Card Charge, a Statement Charge, an Inventory Adjustment, a Sales Tax Adjustment, a Sales Tax Payment, a Payroll Check or a Payroll Liability Payment.
There are very few reasons to create journal entries in QuickBooks and they should be limited to non-transactional entries with the exception of outsourced payroll.
If you use a third-party payroll service like Paychex or ADP, the payroll company sends you reports. To get the numbers from those reports into your company file where you need them, you can use journal entries.
You may also need to enter year-end adjustments for Depreciation, Amortization, Prepaid Expenses, Deferred Revenues, Accrued Payroll and Taxes or to allocate Net Income to Partner Equity accounts. These may be done in the form of journal entries and/or reversing entries.
Otherwise, it’s best to use the source documents. Using the forms allows you to maintain the integrity of the management reports like Sales by Customer or Sales by Item.
You should never make journal entries with Accounts Receivable and/or Accounts Payable accounts. While it may clear out the account to zero, you will notice on your Aging Reports that the fixes live forever in the clients’ QuickBooks file.
Sources and Targets in Journal Entries
All of that being said; I am convinced that some of you are still going to insist on using journal entries for adjusting Accounts Receivable and/or Accounts Payable in QuickBooks®.
With that in mind, a final word of caution – do not use these particular Balance Sheet accounts that require a Customer or Vendor name to be associated with them as the first line in any journal entry.
The first line in a journal entry is the Source of the transaction. All subsequent lines are Targets of the transaction. When you enter a Source Name, QuickBooks® copies that name into any Target Name that you leave blank.
When you make a journal entry in QuickBooks® with Accounts Receivable/Accounts Payable as the first line item and assign a Customer/Vendor Name to that line, each subsequent line uses that Name even if you leave it blank.
For example, let’s say this is the journal entry that you give to your client to enter into their QuickBooks® file to tie out to the year-end trial balance (click images for larger views):
This is what QuickBooks® does with the transaction behind the scenes:
All lines of the journal entry are associated with the Customer Name “Bill Smith”.
Copying the Source Name creates issues when you filter a report for the Customer: Job Name and the report includes transaction lines that you do not intend; it distorts the report.
To avoid having Customer/Vendor Names incorrectly copied down to the blank lines of an adjustment –
- Enter the accounts with names on the lower lines of the journal entry after the accounts without names, or
- Create a dummy name on the Other Names list e.g. “No Name” and enter it on each of the Target lines.
As always if you have any questions regarding any of our QuickBooks tips, please feel free to call for further clarification. This article was based on the 2012 version of QuickBooks.
Rhonda Rosand, CPA
Certified QuickBooks® ProAdvisor
New Business Directions