How to Correct Journal Entries in QuickBooks

Introduction

A small numerical mistake with your accounting journals may lead you to big trouble by the end of the accounting period. One calculation error may cause further damage down the line of the fiscal period, resulting in a data discrepancy or inconsistencies in your financial statements.

Thus, periodic adjustments of your journal entries or accounting ledgers is required to ensure all transactions are accurately recorded. Journal entry is the process of recording business transactions in your financial books. A properly documented journal entry consists of the correct date, amounts to be debited and credited, description of the transaction and a unique reference number.

Journal entries work as a double-entry bookkeeping system, where you make a minimum of two entries for each transaction.Adjusting journal entries throughout an accounting period will save you time, money, and a massive headache. So let’s have a look at how to correctly update these entries.

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.