How to Correct Journal Entries in QuickBooks?

Journal Entry Correction in QuickBooks is necessary to maintain accurate financial records, as even small numerical errors can cause data discrepancies and affect financial statements. While complex methods like exporting and re-importing data carry high risk, the safest and simplest method for correcting a single error is to edit the entry directly within the Chart of Accounts register . Specialized correction methods are used for period-end reconciliation: an Adjusting Journal Entry is a permanent record used to adhere to accrual accounting principles (e.g., depreciation), while a Reversing Journal Entry is an optional, temporary entry used to simplify bookkeeping for the subsequent period (e.g., cancelling out a payroll accrual). After any correction, users should immediately review the Trial Balance and General Ledger reports to confirm that total debits equal total credits and that the audit trail remains intact.

Highlights (Key Facts & Solutions)

• Safest Correction Method: The lowest-risk way to correct a single entry is to edit the transaction directly within the Account History section of the Chart of Accounts, avoiding the complicated and high-risk process of exporting and re-importing data.
• Role of Adjusting Entries (AJE): These are permanent and mandatory entries (under accrual accounting) used to record transactions like depreciation or accrued expenses at the end of an accounting period.
• Role of Reversing Entries (RJE): These are optional, temporary entries used to cancel out a previous adjusting entry (like payroll accruals) on the first day of the new period for bookkeeping convenience.
• Audit and Verification: Immediately after a correction, review the Trial Balance (to ensure total debits equal total credits) and the General Ledger (to verify the chronological transaction record).
• High-Risk Errors: Transposition Errors (reversed digits) unbalance the Trial Balance, while Compensation Errors (two mistakes cancelling each other out) do not unbalance the Trial Balance, making them difficult to detect.
• Accountant Tool: Ticking the “Is Adjusting Journal Entry?” checkbox flags the entry for specific accounting reports, such as the Adjusted Trial Balance, streamlining the year-end audit process.

Significance of Accurate Journal Entries

A journal entry is the first step in the accounting cycle. A journal records all financial transactions and makes a note of the accounts that are affected. Since most businesses use a double-entry accounting system, every financial transaction impacts at least two accounts, while one account is debited, another account is credited. This means that a journal entry has equal debit and credit amounts.

Journal entries are the foundation for all other financial reports. They provide important information that are used by auditors to analyze how financial transactions impact a business. Depending on your business, and how often you choose to update your accounts (whether on a daily, weekly, or monthly basis), you will need to factor in ongoing adjustments.

These adjustments made to original journal entries will update accounts for events that have occurred up to that specific point in time. For instance, they will reflect the activity that has occurred over the lapsing of time from the date of the original entry until the date that the adjusting entry is recorded.

You can use a journal entry if:

• You have to send money between income and expense accounts.
• You need to transfer money from an asset, liability, or equity account to an income or expense account.
• You prefer the traditional system of accounting, that is, entering debit and credit amounts in a journal or ledger.

Identifying Errors in Journal Entries

Accounting problems can lead to incorrect financial statements, bills or payroll that go unpaid, or a false picture of your business’ financial health. These errors can be costly and can cause significant damage to your company size.

Here’s a list of some common journal entry errors:

• Data entry error
• Omission error
• Duplication error
• Transposition error
• Compensation error
• Principle error
• Entry reversal error
• Closing error
• Reconciliation error
• Misuse of accounting software

Reviewing Financial Reports to Spot Errors

Unintentional accounting errors are common if the journal keeper is not careful or the accounting software is outdated. The discovery of such errors usually occurs when companies conduct their month-end book closings. Some companies may perform this task at the end of each week. Most errors, if not all, can be corrected fairly easily.

An audit trail may be necessary if a material discrepancy cannot be resolved quickly. The normal method to handle immaterial discrepancies is to create a suspense account on the balance sheet or net out the minor amount on the income statement as “other.”

If you keep track of invoices to your customers and ensure they’re entered immediately and properly into the accounting software, it may help reduce clerical errors. Monthly bank reconciliation also identifies the errors before the reporting period at the end of the quarter or fiscal year. A bank reconciliation is a comparison of a company’s internal financial records and transactions to the bank’s statement records for the company.

Plus, you can review every entry and compare it against source documents such as invoices, receipts, and contracts. It’s essential to maintain a meticulous record-keeping system to make this process easier.

To check whether an entry is missing from your books, walk through this checklist:

• Identify accounting records that don’t match bank statements.
• Search for discrepancies in the trial balance.
• Find mismatched checks and balances.

Methods to Correct Journal Entries

Below are the methods to correct journal entries in QuickBooks:

• Editing Existing Journal Entries
• Reversing Journal Entries
• Creating Adjusting Journal Entries

Editing Existing Journal Entries (Step-by-Step Guide)

Below are the steps you need to follow if you want to edit existing journal entries in QuickBooks:

Step 1: Open Chart of Accounts 

1. Navigate to Settings and then select the Chart of Accounts. 
2. From the QuickBooks Online dashboard, choose the Apps section.
3. Then, locate the appropriate account for the Transaction.

Step 2: Download the Existing Journal Entries

1. Go to the Action column, and then select Account History. 
2. Select the option Journal Entries and download the journal entries you want to edit. 
3. This is typically done by clicking on the appropriate date range or specific entry IDs.
4. Choose Journal Entries under Transaction/List. 
5. Opt for the preferred search style inside Data Type and give the data range, next you give the template. 
6. Refine your search further by using Show Records From (Start At) and Journal no.

Step 3: Edit Journal Entries

1. Open the Exported File. 
2. The exported data will usually be in an Excel or CSV format. 
3. Open this file using a spreadsheet application like Excel or Google Sheets.
4. Locate the specific journal entry you want to modify. You can search by date, entry ID, or description.
5. Edit the details of the journal entry as required. You can change the amounts, accounts, or any other relevant fields.

Step 4: Re-Import the Edited Entries

1. Save the edited file in CSV format.
2. Go back to the Transactions window and then click on Edit. 
3. Select Journal Entries as the data type.
4. Map the fields from your CSV file to the corresponding QuickBooks fields. Ensure everything is correctly mapped to avoid errors.
5. After mapping, review the data for accuracy. 
6. Once confirmed, proceed with the import.

Step 5: Verify the Changes in QuickBooks

1. Return to QuickBooks Online and then navigate to the journal entries section. 
2. Confirm that the edits have been successfully updated.
3.  If necessary, run relevant reports to ensure that the changes are reflected correctly in your financial statements.

What are the Reasons for Editing Journal Entries in QuickBooks Online?

Here are some common reasons for editing journal entries include:

• Resolve errors such as incorrect amounts, dates, or accounts.
• Make changes to reflect new or updated financial information.
• Adjust entries to ensure accurate financial reporting. 

Reversing Journal Entries

Reversing journal entries are made to reverse or cancel entries that were made in the preceding period and are no longer required. Such as wage accrual which is replaced by an actual payroll expenditure. You can make them at the beginning of an accounting period, and they usually adjust some entries for accrued expenses and revenues from the end of the previous period. You can use reversing entries to adjust records instead of deleting them to help you maintain the integrity of a company’s financial records.

Reversing entries are optional to use as they don’t have a significant effect on financial statements. The purpose of these entries is to reverse the adjusting entries that were made in the previous financial reporting period. It is commonly used for revenue and expense accounts which had accruals or prepayments in the preceding accounting cycle and the accountant prefers not to keep these in the accounting system.

Step-by-Step Guide to Reversing Entries

You should only create journal entries as a last resort or with the help of your accountant. If you need to, you can reverse a journal entry to update and correct it. Or, if you’ve created the entry by mistake then you can delete it.

Reverse a Journal Entry

If you need to divide a transaction between two accounting periods or fix a debit and credit error, follow the steps below. This simply reverses the debits and credits – it doesn’t delete the original journal entry:

1. Go to Settings and then choose a Chart of accounts.
2. Locate the account you created the journal entry for. Then, select Account history.
3. Find the journal entry under the account register. The word “Journal” should be in the Ref No. or Type column.
4. Choose the journal entry to expand the view. Then, click on Edit.
5. Select Reverse.
6. Press Save.

Once you reverse a journal entry, QuickBooks creates a new journal entry to balance it. This is a record of the change you made.

It has slightly different information:

• The new journal entry keeps the original journal no. and adds the letter “R”. This means it’s reconciled.
• The new journal entry holds the same info, such as the Account, Name, and Description, as the original journal entry.
• The new journal entry is dated the first day of the month following the original journal entry date.

Delete a Journal Entry

If you’ve created a journal entry by default, follow these steps to permanently delete it. You must be absolutely sure about deleting the journal entry.

This can quickly unbalance your accounts:

Note: If you invited your accountant to review your books, they can also make an adjusting journal entry instead of deleting the original entry.

1. Hover over Settings and then select Chart of accounts.
2. Locate the account you created the journal entry for. Then, click on Account history.
3. Find the journal entry under the account register. The word “Journal” should be in the Ref No. or Type column.
4. Choose the journal entry to expand the view.
5. Hit the Delete tab.
6. Then, press Yes to confirm.

When to Use Reversing Entries?

Reversing entries can apply to multiple areas in business, regardless of size or industry. These are the most common entries when calculating payroll. You can record an adjusting entry at the end of the month for wages a company owes but hasn’t paid. Then, you post a reversing entry at the beginning of the new month, ensuring you make the correct attribute to the payroll journal entry on payday. You can also use reversing entries to account for past expenses and revenue to avoid overcomplicating the present activity and for future reference.

Some other situations where you might use reversing entries which are as follows:

• Double payments: In case an organization can accidentally make a repeat payment for a good or service, using reversing entries, you can balance the company’s books with the correct entries after receiving a refund or shipment.

• Miscalculated revenue: Reversing entries also can be appropriate in accounting when an organization miscalculates its revenue. You can use the next accounting period to balance the revenue and correct the previous error.

• False Forecasts: If a company’s financial results aren’t predictable, you can use reversing entries to adjust their books. Consider checking data from historical records, market trends and similar industry forecasts for more reliable and accurate provisions.

• Incorrect Journal Entries: You can use reversing entries to correct inaccurate journal entries, like if you purchase equipment and debit the entry in the tax expense instead of the equipment expense account. You can reverse the entries with a debit entry to the equipment expense account and a credit entry to the tax expense account.

Creating Adjusting Journal Entries

An adjusting journal entry is a type of journal entry that adjusts an account’s total balance. Accountants commonly use adjusting journal entries to eliminate minor errors or record uncategorized transactions. Adjusting journal entries are used to reconcile transactions that have not yet closed, but that straddle accounting periods.

These can be either payments or expenses whereby the payment does not occur at the same time as delivery. Here’s how to create adjusting journal entries and review them on an Adjusted Trial Balance report in QuickBooks Online Accountant.

There are a variety of reasons to create adjusting journal entries such as:

• Depreciation or amortization
• Reallocating accruals and reversing accruals of prepaid income or expenses
• Adjusting tax payable for interest, discounts, or penalties
• Entering bank or credit card fees or interest

You can also mark journal entries as Adjusting journal entries. This allows you to easily identify and get reports for adjusting journal entries.

Step-by-Step Guide to Creating Adjusting Entries

Enter an Adjusting Journal Entry

You can create adjusting journal entries from your client’s QuickBooks Online company file.

Let’s see how:

1. Log in to QuickBooks Online Accountant.
2. Select the Go to QuickBooks dropdown and then choose your client’s company.
3. Click + New.
4. Hit the Journal entry icon. 
5. Tickmark the Is Adjusting Journal Entry? Checkbox.
6. Follow the on-screen steps to record the journal entry.
7. Press Save and Close.

Review Adjusting Journal Entries

Run an Adjusted Trial Balance Report to review your adjusting journal entries. This report lists all account balances in the general ledger before and after you make adjusting journal entries. It also holds the total adjusting entries.

1. On QuickBooks Online Accountant, type Adjusted Trial Balance into the search bar. 
2. Or navigate to the Reports menu and then choose the Adjusted Trial Balance report.
3. Select Customize to adjust the report as required.
4. Make sure the total debit balances equal the total credit balances.

Examples of Adjusting Entries

Below are an example of adjusting entries:

Let’s suppose a firm that has a fiscal year ending Dec. 31 takes out a loan from the bank on Dec. 1. The terms of the loan show up that interest payments are to be made every three months. At this point, the company’s first interest payment is to be made on March 1. However, the company still needs to accrue interest expenses for the months of December, January, and February.

Since the company is set to release its year-end financial statements in January, an adjusting entry is needed to reflect the accrued interest expense for December. The accrued interest expense must be recorded on the December income statement, and the liability for the interest payable must be reported on the December balance sheet to accurately report the company’s operations and profitability. The adjusting entry will debit interest expense and credit interest payable for the amount of interest from 1, Dec to 31, Dec.

Best Practices for Correcting Journal Entries

• Maintaining an Audit Trail:

An audit trail is a sequential record detailing the history and events related to a specific transaction or ledger entry. It should detail the type of event, the sequence of events, when it occurred, where it occurred, its source, the outcome, and subjects or entities associated with the event.Journal entries create an audit trail, allowing auditors and accountants to trace transactions back to their source documents, facilitating the verification of financial records. It also helps to determine the validity of an accounting entry, source of funds, or trade.

• Consulting with an Accountant:

Accountants help their clients to improve their financial position, maintain efficient and accurate accounting practices and streamline their accounting protocols. When it comes to removing discrepancy from your journal entries, you are recommended to consult with your accountant to ensure that changes are handled correctly.

• Avoiding Common Pitfalls:

Incorrect journal entries may lead to discrepancies in financial statements, impacting decision-making and financial health.

This is why you need to avoid common journal entry mistakes which may include:

• Unbalanced journal entries, where the total debits do not equal the total credits. This may result in an inaccurate trial balance and financial statements.
• Misclassification of transactions, such as recording an expense as an asset or vice versa, can distort financial reports and lead to incorrect tax filings.
• Entering the same transaction more than once can inflate expenses or income, leading to skewed financial reports.
• Incorrect amounts, whether due to typographical errors or misinterpretation of transaction details. 
• Vague or inadequate descriptions in journal entries can make it challenging to understand the nature of transactions, resulting in confusion and errors.
• Recording transactions with wrong dates can affect financial reporting periods.
• Failure to attach or reference supporting documentation for journal entries can make it difficult to verify transactions during audits or reviews.

Conclusion

Journal entries are the foundation of accounting and serve as the building blocks for accurate financial records. By recording financial transactions in a systematic and organized manner, journal entries enable businesses to maintain transparency, accountability, and compliance with accounting standards and regulations. They provide a comprehensive record of financial activities, facilitating informed decision-making and ensuring the accuracy and reliability of financial statements.

Accurate and complete journals are also essential in the auditing process, as journal entries provide detailed accounts of every transaction. Auditors, both internal and external, will look for entries or adjustments that lack the proper documentation, explanations or approvals or that are outside the norm for the business standards.

FAQs:

1. What is the lowest-risk, easiest method for correcting a single, incorrect Journal Entry in QuickBooks Online (QBO) or Desktop (QBD)?

The lowest-risk method is to edit the entry directly within the account register or transaction history, which is safer and simpler than exporting and re-importing data.

• QBO Procedure:
  • Go to Settings and then Chart of Accounts.
  • Locate the affected account and select View Register or Account History.
  • Find the transaction with the “Journal” type and click on it to expand.
  • Select Edit and modify the incorrect amount, date, or account directly in the QuickBooks window.
• Why it’s Safer: Editing the entry in-app maintains the integrity of the database and eliminates the high risk of file corruption or mapping errors associated with exporting to Excel and importing a CSV file.

2. What is the fundamental difference between a Reversing Journal Entry and an Adjusting Journal Entry?

Both types of entries are used at the end or beginning of an accounting period, but they serve distinct purposes regarding the permanent state of the books.

• Adjusting Journal Entry (AJE):
  • Purpose: To adhere to the accrual basis of accounting by recording transactions that have occurred but have not yet been recorded, such as depreciation, accrued wages, or prepaid expenses.
  • Permanence: AJEs are permanent records and are required to accurately report financial position at the end of a period.
• Reversing Journal Entry (RJE):
  • Purpose: To cancel out a specific accrual-based adjusting entry (like accrued wages) made at the end of the previous period, simplifying bookkeeping for the next period.
  • Permanence: RJEs are temporary and are made on the first day of the new accounting period; they are optional but used for convenience.

3. What is the primary risk of using the export/edit/import method for correcting Journal Entries?

The primary risk of using the export, edit, and re-import method is data corruption and error escalation, which can unbalance accounts far more severely than the original mistake.

• Mapping Errors: If the column headers or data types in the exported CSV file are incorrectly mapped back to the QuickBooks fields during import, transactions can be assigned to the wrong accounts or categorized incorrectly.
• Unique Identifier Issues: Errors in unique reference numbers or dates can cause the software to create duplicate transactions instead of modifying the existing one.
• Audit Trail Violation: Repeated exports and imports make the audit trail complicated and difficult to follow, which can create significant problems during financial review.

4. What is the benefit of ticking the “Is Adjusting Journal Entry?” checkbox in QuickBooks Online Accountant?

Ticking the “Is Adjusting Journal Entry?” checkbox is a critical step for accountants and bookkeepers because it allows for easy identification and review of year-end corrections.

• Reporting: It automatically flags the entry so that it appears correctly on specialized audit and accounting reports, such as the Adjusted Trial Balance report.
• Audit Trail: This checkbox provides a clear, digital marker confirming that the entry was made specifically to conform to accrual accounting principles, separating it from regular day-to-day transactions.
• Review: It streamlines the final review process by allowing an accountant to quickly filter and verify all entries that impacted the financial reports at the end of the period.

5. What two QuickBooks reports should be reviewed immediately after making a major Journal Entry correction to spot potential errors?

The two most essential reports to review immediately are the Trial Balance and the General Ledger.

• Trial Balance:
  • Purpose: Confirms that the fundamental principle of double-entry bookkeeping remains intact: total debits equal total credits.
  • Error Check: If the Trial Balance becomes unbalanced after the entry, it means the entry was recorded incorrectly (e.g., a Transposition Error or unequal amounts).
• General Ledger:
  • Purpose: Provides a detailed, chronological record of every transaction affecting the accounts involved in the Journal Entry.
  • Error Check: Allows the user to confirm that the correct accounts were impacted for the correct amount and that no unintended entries were created.

6. What is the difference between a Transposition Error and a Compensation Error in journal entries?

Both are common mistakes, but they are identified and corrected using different methods.

• Transposition Error:
  • Definition: Occurs when the digits in an amount are accidentally reversed (e.g., entering $1,250 instead of $1,520).
  • Detection: This error will unbalance the Trial Balance.
• Compensation Error:
  • Definition: Occurs when two separate errors are made that unintentionally cancel each other out (e.g., overstating one expense by $500 and understating another expense by exactly $500).
  • Detection: This error will not unbalance the Trial Balance, making it much harder to detect and requiring a full review of the General Ledger or source documents.

7. Besides financial transactions, what is another common situation where a Reversing Entry is frequently used for convenience?

Reversing Entries are frequently used to handle payroll accruals, especially at the end of the month or fiscal year.

• Scenario: A company may need to record an adjusting entry on December 31st to recognize employee wages earned in December but not paid until the first payroll run in January. This creates an accrued expense (debit Wages Expense, credit Wages Payable).
• Reversing Use: The accountant creates a Reversing Entry on January 1st to automatically credit Wages Expense and debit Wages Payable.
• Benefit: When the actual payroll check is cut in January, the subsequent entry correctly records the transaction without requiring the bookkeeper to manually account for the partial accrual from the previous year, simplifying the payroll process.