Adjusting QuickBooks Journal Entries at Year-End

Introduction

Year-end adjustments are changes that need to be made to the balance sheet and profit and loss statement in order to ensure that the year-end reports are an accurate reflection of the company’s accounts. By completing year-end adjustments, a company can conclude the overall financial position of the business for their financial year, which is sometimes referred to as being able to “close the books”.

Adjustments are necessary as financial reporting throughout the year will be made on an accruals basis. The accruals basis is a method of accounting whereby transactions of revenue are recorded as they are earned, as are expenses when they have been incurred, irrespective of whether money, goods or services have been exchanged.

For instance, this would mean that revenue would be accounted for as soon as a customer was sent an invoice, rather than when payment has been received. The same can be applied to expenses where a company may receive an invoice for stock ordered but have yet to make payment, however a deduction would still be recorded in the reports.

The purpose of adjusting entries is to convert cash transactions into the accrual accounting method. Accrual accounting is based on the revenue recognition principle that seeks to recognize revenue in the period when it was earned, rather than the period when cash is received.

An adjusting journal entry involves an income statement account (revenue or expense) along with a balance sheet account (asset or liability). It typically relates to the balance sheet accounts for accumulated depreciation, allowance for doubtful accounts, accrued expenses, accrued income, prepaid expenses, deferred revenue, and unearned revenue.

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. Year end adjusting entries update accounts to ensure accurate financial statements. They address accruals, deferrals, and other adjustments, providing a true depiction of a company’s financial position before the end of the fiscal year.

Understanding Adjusting Journal Entries

Adjusting entries are made at the end of an accounting period post-trial balance, to record unrecognized transactions, and rectify initial recording errors. They align real-time entries with accrual accounting, and involve adjustments such as accrued expenses, revenues, provisions, and deferred revenues.

Common Types of Adjustments

Adjusting entries include accruals for revenue and expenses, deferrals for prepayments, bad debt expenses, and depreciation and amortization. These entries align financial statements with actual economic activity, ensuring accurate and transparent reporting.

Below are some common adjusting entries:

Depreciation and Amortization

Depreciation and amortization serve as specific instances of adjusting entries falling within the broader category of estimates. Estimates refer to adjusting entries primarily associated with non-cash transactions. Depreciation involves distributing the cost of a depreciable asset over its useful life. Typically applied to fixed assets like buildings, vehicles, and manufacturing equipment, depreciation ensures a systematic reduction in asset value over time.

Amortization, on the other hand, pertains to intangible assets like patents and licenses. The process of systematically and periodically reducing the value of these assets is executed through adjusting entries during the accounting close. The adjusting entry to record the depreciation expense involves debiting the depreciation expense account and crediting the accumulated depreciation account. This ensures a proper reflection of the gradual reduction in the value of assets over time.

Accrued (Revenue & Expense)

Accruals are revenues and expenses that have not been received or paid, respectively, and have not yet been recorded through a standard accounting transaction. For instance, an accrued expense may be rent that is paid at the end of the month, even though a firm is able to occupy the space at the beginning of the month that has not yet been paid.

Bad Debt Provisions

Provisions for bad debts involve allocating funds to anticipate future expenses. A key example is the adjustment for doubtful accounts, which addresses potential non-payment by customers. When a business extends credit, this entry determines the need to set aside funds in preparation for possible defaults. By making this adjustment, the financial records accurately reflect the business’s financial standing, ensuring a more realistic representation of its assets and liabilities. Adjusting entries enhances financial accuracy for informed decision-making.

Deferred (Revenue & Expense)

Deferrals refer to revenues and expenses that have been received or paid in advance, respectively, and have been recorded, but have not yet been earned or used. Unearned revenue, for instance, accounts for money received for goods not yet delivered.

Estimates

Estimates are adjusting entries that record non-cash items, such as depreciation expense, allowance for doubtful accounts, or the inventory obsolescence reserve.

Preparing for Year-End Adjustments

In order to prepare for year-end adjustments, there are few areas that you may want to stay on top of:

• Expenses: Every single legitimate business expense (those which are “wholly and exclusively” for the purpose of the business) will help cut your tax bill so make sure you get employees to hand in their expenses form in time to ensure it can be accounted for into the particular financial period. If you’ve had a specific profitable year, you may even want to consider areas you can invest in before your year-end.

• Invoices: Make sure you plan enough time to chase up on overdue invoices. You may be tempted to let payments fall into the next period to pay less corporation tax for the period just gone, however you need to be wary when doing this. As a result, your financial reports may show that the business is less profitable than it actually is, which can be detrimental if you are looking to raise funding either through bank loans or investors.

• Reconciliations: Reconcile every single BALANCE SHEET ITEM and prepare their respective control account as well. Also, attach a snapshot of the supporting document to justify the balance in the excel TB, control account and finalisation software.

• Paperwork: Staying organised on your paperwork throughout the year will save you a lot of time when it comes to year-end. You will need to collect all your receipts and bank statements as evidence for your financial reports. It is also a legal responsibility for limited company directors to keep company records for at least six years from the end of the company accounting period that they relate to.

• Deadlines: Be aware of your tax deadline. As discussed above, your year end is usually the last day of the month from the date you first incorporated your company with Companies House. You have 12 months from this date to submit your corporation tax return, else you’ll receive an automatic penalty. However, it’s important to remember that you have a second deadline in which to pay your corporation tax and that is only 9 months and a day after your accounting period. Missing this payment will result in interest being added on.

Notes: Preparation of notes and queries to clients is one of the most integral yet important tasks to do. Reason being the client will not have the time to guess why a certain adjustment was made but can read the notes section to understand what your approach was. In addition to this, do not make assumptions in accounts preparation unless already told by the client or you have a confirmation for it. If an assumption is being made, make sure to jot it down in the notes section or the email to the client.

Why to Create Adjusting Journal Entries in QuickBooks?

You can create adjusting journal entries for a variety of reasons:

• 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.

Creating Adjusting Journal Entries in QuickBooks

Step-by-Step Process to Record Adjustments Journal Entries in QuickBooks

Below we’ve listed how to make adjusting journal entries in both QuickBooks online and desktop:

For QuickBooks Online Accountant 

An adjusting journal entry is a type of journal entry that adjusts an account’s total balance. Accountants generally use adjusting journal entries to fix minor errors or record uncategorized transactions. Here’s how to create adjusting journal entries and review them on an Adjusted Trial Balance report in the QuickBooks Online Accountant.

Enter an Adjusting Journal Entry

You’ll make adjusting journal entries from your client’s QuickBooks Online company file.

• Login to QuickBooks Online Accountant.
• Choose the Go to QuickBooks dropdown menu and then select your client’s company.
• Click + New.
• Select Journal entry.
• Tickmark the Is Adjusting Journal Entry? checkbox.
• Follow the on-screen steps to record the journal entry.
• Press the Save and Close tabs. 

For QuickBooks Desktop

If you are a business owner or accountant, you may need to enter the Adjusting journal entries in QuickBooks desktop in order to accurately reflect the financial position of your business. Adjusting journal entries are used to record changes in the financial position of a business, such as depreciation, amortization, and accruals. By entering these adjusting journal entries, you can ensure that your financial statements are accurate and up-to-date.

• Go to QuickBooks.intuit.com
• Hover over the Company menu.
• Select Make General Journal Entries.
• Type the date.
• QuickBooks will automatically assign the Journal number.
• Tickmark the Adjusting Entry checkbox.
• Record the journal details.
• Press Save and Close.

Common Year-End Adjustments in QuickBooks

Several common year-end adjustments must be made to the Balance Sheet and Profit & Loss statement when a business uses the full “accrual basis” of accounting. These adjustments typically are made by journal entries to confirm that year-end reports accurately reflect the business’ accounts. The types of year-end adjustments commonly made include accruals, deferrals and non-cash expenses.

Accrual Adjustments Include Accrued Revenues and Accrued Expenses

Accrued expenses, or accrued liabilities, are those that you incur in a pay period but pay for at a later date. This can happen with recurring bills, like utilities or payroll. For instance, your employees may work throughout the month but receive a paycheck on the first of the following month. Because the amount applies to the previous month, you make an accrued expense adjustment.

On the other hand, Accrued revenue is when you earn money for providing products or services to customers but receive payment at a later date. Because it’s important that you accurately record revenue in the correct accounting period, you make an adjusting entry. Often, this happens more with services and interest accrual.

Deferral Adjustments Include Deferred Revenues and Prepaid Expenses

Deferred or prepaid expenses are amounts companies pay in advance for services or products. Different from accrued expenses, you make this adjustment to the month in the future when the service takes place. This is common in advertising, advance rent payments and insurance payments.

Deferred revenue is when you receive payment for a service you’ve yet to perform or a product you’ve yet to receive. This is common in subscription models or when retail stores sell gift cards. For example, you can receive payment as a gift card but may make the adjustment for the month when the customer redeems their card.

Revenues like this should be recorded as a liability in an unearned revenues account on the balance sheet when received since the business has not earned them. Then, over time, these deferred revenues are adjusted to reflect that they have been earned by debiting unearned revenues and crediting the appropriate revenue account on the income statement.

When a business makes an expense that benefits more than one accounting period—such as paying insurance premiums—they must be recognized as prepaid expenses. Initially, these prepayments should be recorded on the balance sheet as an asset in a prepaid expense account.

Non-Cash Expenses

Non-cash expenses represent depreciation and similar adjusting entries. Depreciation is different from other adjusting entries in that you must consider the long-term aspects of this account reflected in the accumulated depreciation of each tangible asset over the lifetime of the asset. While we depreciate assets, the accumulation of depreciation occurs in a contra-asset account.

Depreciation expenses are when you make a one-time payment to account for equipment’s loss in value. Calculate depreciation by subtracting the original value from the current value of an item. To record this as an adjusting entry, divide this amount by the number of months you’ve used the equipment. You can calculate depreciation in other ways, and how you record this can vary based on your cash and liability.

Amortization essentially is identical in theory, but applies to intangible assets. It is the practice of writing down the value of intangible assets over the useful life of those assets. Amortization expense appears on the income statement, and accumulated amortization is the contra-asset account appearing on the balance sheet for the corresponding intangible asset.

Note: Both depreciation and amortization can have significantly different posting values between a company’s book value and reported income tax (amount reported on the return) value rely on the methods of computation elected for book and tax reporting purposes.

Year-End Adjustments QuickBooks Makes Automatically

QuickBooks performs certain year-end adjustments, based on your fiscal year start month.

• QuickBooks adjusts your income and expense accounts at year-end to zero them out. Therefore, you can start your new fiscal year with a zero net income.
• QuickBooks makes an adjusting entry to your net income. For instance, if your profit for the year was $12,000, on the last day of your fiscal year the equity section of your Balance Sheet would show a line for net income of $12,000.
• On the first day of the new fiscal year, QuickBooks increases your Retained Earnings equity account by the previous year’s net income ($12,000 in this example) and decreases your net income by the same amount. This way, you start each new fiscal year with a net income of zero.

Review Adjusting Journal Entries in QuickBooks

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 lists the total adjusting entries.

1. In 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. Choose Customize to adjust the report as required.
4. Make sure the total debit balances equal the total credit balances.

Finalizing Year-End Procedures

The year-end procedure typically involves financial, operational, and administrative tasks to ensure your organization starts the new fiscal year on solid ground.

Here’s a checklist to guide you:

Financial Closeout

• Ensure all bank, credit card, and general ledger accounts are reconciled.
• Check for missing, duplicate or incorrect entries. 
• Make necessary journal entries, including depreciation, accruals, and deferrals.

Tax Preparation

• Prepare and review profit & loss statements, balance sheets, and cash flow statements.
• Record outstanding expenses, deferred revenues, and other year-end journal entries.
• Organize tax documents, including W-2s, 1099s, and other necessary filings. 

Employee and Payroll Updates

• Update employee information (address, tax withholding forms, etc.).
• Ensure year-end payroll matches tax records.
• Process year-end bonuses and update benefits for the new year.

Planning for the New Fiscal Year

• Finalize next year’s objectives and allocate budgets accordingly.
• Update company policies or procedures if required.
• Plan for strategic and operational meetings early in the new financial year.

Compliance and Legal Requirements

• Verify compliance with local, state, and federal regulations.
• Document major decisions made during the year.
• Try to update any expiring licenses or permits.

Stakeholder Communication

• Prepare a year-end report summarizing financial and operational highlights.
• Communicate achievements, challenges, and goals with employees, board members, or investors.
• Send holiday greetings or business updates to clients.

Final Review and Documentation

• Conduct a final review with key stakeholders (finance, HR, operations).
• Ensure all documentation is complete and securely stored.
• Create a checklist for rolling into the new year, including tax filings, audits, and strategic actions.

Best Practices and Tips

To ensure the accuracy of financial statements and compliance with tax regulations, adjusting year-end journal entries is an essential task.

Below are best practices and tips to streamline this process:

Preparation Before you Start

• Reconcile all accounts (bank, credit card, loans) before making adjustments.
• Review financial reports like Trial Balance and General Ledger to identify discrepancies.
• Back up your QuickBooks data to avoid accidental data loss.

Recording Adjustments

• Match debits and credits to the correct accounts (e.g., expenses, liabilities, or assets).
• Add clear descriptions for each entry to ensure easy reference during audits.
• Attach supporting documents (e.g., invoices, schedules) to entries for a complete audit trail.

Common Adjustments

• Record depreciation for fixed assets using CPA-provided schedules.
• Adjust for accrued expenses and prepaid items (e.g., utilities, insurance).
• Write off bad debts for uncollectible receivables.
• Make inventory adjustments based on physical counts.

Tips for Accuracy

• Coordinate with your accountant to ensure compliance with tax laws and accounting standards.
• Regularly review entries for errors or inconsistencies.
• Use the Accountant Toolbox to access features like adjusting journal entries.

Post-Adjustment Review

• Re-run financial reports (e.g., Profit & Loss, Balance Sheet) to confirm accuracy.
• Lock prior periods by setting a closing date to prevent changes to prior-period data..

Common Mistakes to Avoid

• Forget to reconcile accounts before adjusting entries.
• Not using clear descriptions, leading to confusion during audits.
• Avoid making direct adjustments to income or expense accounts for balance sheet items.
• Double-check that all entries balance (debits = credits).

Automating Recurring Adjustments

Set up recurring journal entries for regular adjustments, like depreciation, using QuickBooks’ Recurring Transactions or Memorized Transactions features.

Troubleshooting Common Issues

Here’s how to troubleshoot common year-end adjusting entries errors in QuickBooks:

01. Balancing Errors

• Problem: Debits and credits don’t balance.

Solution: Double-check entries for numerical accuracy and ensure total debits equal total credits. Use the Trial Balance report for quick verification.

02. Incorrect Account Selection

• Problem: Adjustments posted to the wrong accounts (e.g., recording expenses directly instead of through accrued liabilities).

Solution: Refer to your chart of accounts and make sure you’re using the correct account type (e.g., asset, liability, income).

03. Missing Supporting Documentation

Problem: Adjustments lack documentation, making audits challenging.

• Solution: Always attach supporting files (e.g., receipts, schedules) to journal entries for a clear audit trail.

04. Unreconciled Accounts

Problem: Adjustments made before account reconciliations lead to discrepancies.

• Solution: Reconcile all accounts before making any year-end adjustments to avoid duplication or omission.

05. Inventory Adjustments

Problem: Inventory counts or values are inaccurate.

• Solution: Conduct a physical inventory count, and reconcile it with your QuickBooks records before adjusting inventory.

06. Forgotten Adjustments

Problem: Key adjustments like depreciation or accrued expenses are missed.

• Solution: Use a checklist of common year-end adjustments and coordinate with your CPA.

07. Duplicate Adjustments

Problem: Entries are recorded more than once.

• Solution: Check the General Ledger or Journal Entry reports to ensure no duplication exists.

08. Tax Implications

Problem: Incorrect adjustments impact tax filings.

• Solution: Review all adjustments with a tax professional to confirm compliance with tax laws and regulations.

09. Issues with Recurring Entries

Problem: Recurring journal entries (e.g., for depreciation) are not updated for the new fiscal year.

• Solution: Verify and update recurring templates to reflect new schedules or amounts.

10. Audit Log Discrepancies

Problem: Unexplained changes to journal entries are found in the audit log.

• Solution: Use the audit log (QuickBooks Online) to identify and correct unauthorized or incorrect changes.

Conclusion

An adjusting journal entry is an entry in a company’s general ledger that records transactions that have occurred but have not yet been appropriately recorded in accordance with the accrual method of accounting. The entry records any unrecognized income or expenses for the accounting period, such as when a transaction starts in one accounting period and ends in a later period.

Adjusting journal entries can also refer to financial reporting that corrects a mistake made earlier in the accounting period.  It ensures the accuracy of several financial records that accounts and bookkeepers manage. When a business accrues expenses and revenue, it must match these values between accounting periods on its balance sheet and income statement to accurately reflect your cash flow.