Highlights (Key Facts & Solutions)

• Mandatory Naming: Any Journal Entry line involving Accounts Receivable (A/R) or Accounts Payable (A/P) must include a linked Customer or Vendor name to ensure the Balance Sheet matches subsidiary reports.
• JE Purpose: Journal Entries are reserved for advanced accounting adjustments, such as writing off bad debt, correcting prior year balances with reversing entries, or clearing balances between a customer/vendor who is the same entity.
• Bad Debt Logic (A/R Write-Off): To write off bad debt, the JE must Debit Bad Debt Expense and Credit Accounts Receivable, ensuring the A/R line is linked to the specific Customer’s name.
• Vendor Overpayment Logic (A/P Clear-Out): To write off a small vendor overpayment, the JE must Debit an Other Income/Offset Account and Credit Accounts Payable, ensuring the A/P line is linked to the specific Vendor’s name.
• Routine Transaction Best Practice: For daily operations, always use the dedicated forms (Invoices, Receive Payments, Enter Bills, Pay Bills) instead of manual Journal Entries to automate tax and inventory tracking and reduce the risk of manual errors.
• Clearing Balances: When offsetting a customer balance against a vendor balance (A/R vs. A/P), the transaction must be processed using two separate entries and a neutral Clearing Account, as QuickBooks prohibits using A/R and A/P in the same transaction.

Introduction to Journal Entries in QuickBooks

Journal entries are the last resort for entering transactions. They allow you to move money between accounts and force your books to balance in a specific way. Use them only if you understand accounting or you’re following the advice of your accountant. You may also have a good understanding of debits and credits.

When adding Accounts Receivable (A/P) or Accounts Payable (A/R) for any line in a Journal entry, you must specify a Customer or Vendor name. Currently, the ability to save the transaction without entering a name is unavailable. This is working as design.

Here are a few reasons to create a journal entry:

• Enter debits and credits manually, like in traditional accounting systems.
• Move money between income and expense accounts.
• Transfer money from an asset, liability, or equity account to an income or expense account.

Create a Journal Entry

1. Click + New. 
2. Select Journal entry.
3. On the first line, select an account from the Account field. Depending on if you need to debit or credit the account, enter the amount in the correct column.
4. On the next line, choose the other account you’re moving money to or from. Depending on if you entered a debit or credit on the first line, type the same amount in the opposite column.
5. Verify the amounts – you must have the same amount in the Credit column on one line and the Debit column on the other. This means the accounts are in balance.
6. Write down information in the memo section so you know why you made the journal entry.
7. Press Save and New or Save and Close. 

How to make a journal entry for accounts receivable in QuickBooks?

If you decide to create a journal entry, you need to enter a date of the end of the time period, and set it to reverse on the following day. For invoices, the journal entry debits the account affected by the invoice and credits accounts receivable while for bill entries, it credits the asset account and debits accounts payable.

Warning: It is important to consult an accountant before trying to correct these accounts with a journal entry.

1. Click + New.
2. Select Journal Entry under Other.
3. Type the Journal date. The Journal date is the date of the end of the time period.
4. On the first line, choose the account affected by the invoice from the dropdown list in the Account column.
5. Enter the amount in the Debit column.
6. Write down the reason for this journal entry into the Description field.
7. In the second line, choose Accounts Receivable (A/R) from the Accounts dropdown list. The amount is automatically entered under the Credits column.

Note: If you’re splitting this over several customer accounts, change the amount to reflect a single customer’s sales tax.

8. Hit the customer from the dropdown list into the Name field.
9. Press the Save and Close buttons.

The journal entry is now created.

How to make a journal entry for accounts payable in QuickBooks?

Note: For offsetting accounts payable or vendor balances, the Credit account type is usually expense or liability. But it’s really important to consult with an accountant. Same with accounts receivable adjustment.

1. Click + New.
2. Under Other, choose Journal Entry.
3. Type the Journal date. The Journal date is the date of the end of the time period.
4. On the first line, choose the expense or liability account affected by the bill from the dropdown list under the Account column.
5. Enter the amount in the Credits column.
6. Write down the reason for this journal entry in the Description field
7. On the second line, select Accounts Payable (A/P) from the Accounts dropdown list. The amount should be automatically entered in the Debit column.
8. Hit the Vendor from the dropdown list in the Name column.
9. Press Save and Close.

The journal entry is now created.

Clearing Balances in Accounts Receivable and Payable in QuickBooks

The clearing process is used for Accounts Payable vendors that are also Accounts Receivable customers. You can apply the Accounts Receivable balances automatically or individually to the Accounts Payable balance. 

After the clearing process is completed for a vendor/customer, transactions are recorded in both Accounts Payable and Accounts Receivable.

Warning: If you link multiple customers to a single vendor, you must verify that the amount being cleared from the customer to Accounts Payable does not exceed the vendor’s balance, or the vendor’s account may have a negative balance.

The clearing process applies the Accounts Payable balance to the Accounts Receivable open invoice balance; it clears the oldest invoices in the account first and applies the Accounts Payable balance until it is zero. This process creates payments in Accounts Receivable with a check number of CLEARING.

Clearing Old Receivables and Payables in QB without Impacting Financials

You can create a general journal entry to write off the amount. Make sure to consult with your accounting professional before trying any of these options.

Here’s how:

Start with Opening a Journal

1. From the Company menu, choose Make General Journal Entries.
2. Edit the date and fill out the entry number if required under the Make General Journal Entries window.

For a Customer with an Overpayment

1. Select the Account field and then click on Accounts Receivable from the dropdown list.
2. Type the amount in the Debit column, tab to the Name column, and choose a Customer Name under the dropdown list.
3. On the next line, click on the offset account and enter the amount in the Credit column. The offset account is usually an Expense account.
4. Press Save and Close.

 For Suppliers with Overpayment

1. Choose the Account field and select Accounts Payable from the dropdown list.
2. Enter the amount under the Credit column, tab to the Name column, and select the supplier name from the dropdown list.
3. On the next line, click on the offset account and type the amount under the Debit column.
4. Hit the Save and Close tabs. 

Clearing Old Accounts Receivables Balances

Linking the journal entry to the invoice will help you to reduce the remaining customer balance. But before you can do this, you need to make sure that the affected account of the journal entry is Accounts Receivable. This way, the amount will show how once you apply it to the invoice.

Here’s how:

1. Navigate to the Lists menu.
2. Select the Chart of Accounts, then find the account holding the journal entry.
3. Open the transaction and then confirm that the affected account is Accounts Receivable.
4. Press Save & Close once you’re done.
5. Hover over the Customers menu, then choose  Receive Payments.
6. Choose a customer from the Received From drop-down menu.
7. Hit the Discounts and Credits icon and then select the journal entry in the Available Credits section.
8. Click Done and select Yes if you’re prompted to confirm the transfer. 
9. Press Save & Close.

Clearing Old Transactions from Accounts Payable

Clearing old Accounts Receivable (A/R) and Account Payable (A/P) balances can be a little tricky. The most efficient way to clear any payables is to pay it off. Aside from making journal entries, this includes creating a clearing account. The steps are similar to setting up a bank account in your chart of accounts, but without an opening balance.

When you’re ready, you can follow the steps below to clear off those A/P balances:

Create the appropriate journal entry:

1. Hit the Plus sign (+), then select Journal Entry.
2. Under the Journal Entry window, edit the date if required.
3. From the Account Field, select Creditors from the drop-down list.
4. Type the amount in the Debit field.
5. Click the name field and then choose the Supplier from the drop-down list.
6. In the next row, select the off-setting or the clearing account in the Account field.
7. The amount in the Credit field must be equal to the amount in the Debit field.
8. Press Save & Close.

Apply the general journal entry to the existing balance:

1. Move to Expenses, and then select Suppliers at the top
2. Hit the supplier name, and search for the Bill to pay it.
3. Press the Make Payment button in the top-right corner. When the Bill Payment window opens up, the Journal Entry will be under the Credits section.
4. Choose the Bill and the Journal Entry to link them.
5. Select Save & Close.

How to Clean Up Accounts Receivables from Prior Years?

Below we’ve discussed how to clean up accounts receivables from prior years in both QuickBooks Online and Desktop:

In QuickBooks Online

You can create Journal Entry (JE) and then reverse it to clear any accounts receivable in QuickBooks Online. You’ll just have to type a date of the end of the time period and set it to reverse on the following day. But before you proceed, it is suggested to consult with your accountant to ensure you enter the transactions accurately and avoid data messing up with your accounts.

Here’s how:

1. Click + New, then select Journal entry under the Other column.
2. Enter the Journal Date.
3. Below the Account drop-down, choose the account affected by the transactions and then type the amount in the Debit column.
4. Add the Accounts Receivable on the next line.
5. Select the customer’s name in the drop-down.
6. You can enter a note under the Memo field
7. Then, press Save and Close to record the transaction.

 After this, you’re now ready to reverse it, here’s how:

1. Hit the Search icon on the toolbar.
2. Find and open the journal entry you created.
3. Select Reverse.
4. Modify the Journal Date to one day after the original journal entry’s Journal Date.
5. Click Save and Close.

In QuickBooks Desktop

If you’re seeing customers with net zero balances, it is usually caused by an invoice that’s not linked to payment or credit.

To apply for the credit, here’s how:

1. Hit the Customers tab, then select Receive Payments.
2. Enter the customer name in the Received From drop-down.
3. Under the Payment Amount field, write down the payment you received from the customer.
4. Press the More button and then Add New Payment Method button.
5. Set up your payment method and then press OK.
6. Mark the invoices you wish to receive the payment.
7. Click Save & Close.

However, if no payments aren’t showing, you’ll need to record them as bad debt and write them off.

Here’s how to add an expense account to track the bad debt:

1. Head to the Lists menu.
2. Choose a Chart of Accounts.
3. Select the Account menu at the bottom left, then click New.
4. Hit Expense, then press Continue.
5. Type an Account Name. 
6. Click Save and Close.

 Once done, you can start over to close out the unpaid invoice. 

1. Navigate to the Customers menu.
2. Choose Receive Payments.
3. Input the name of the customer under the Received field.
4. For the Payment amount, enter $0.00.
5. Select Discounts and credits.
6. Under the Amount of Discount field, enter the amount you’d like to write off.
7. Click on the bad debt account for Discount Account, and then press Done.
8. HIt the Save and Close tabs.

Best Practices for Managing A/P and A/R with Journal Entries

Accounts Payable (A/P) and Accounts Receivable (A/R) management is crucial for maintaining accurate financial records and ensuring smooth cash flow.

Here are best practices for managing A/P and A/R, particularly focusing on the proper use of journal entries:

Accounts Payable (A/P) Management

Use Bill and Payment Features Instead of Manual Journal Entries

Use the “Enter Bills” feature to record vendor invoices and the “Pay Bills” feature to track payments. QuickBooks automatically creates the necessary journal entries and helps to reduce errors. 

Set Up Vendor Terms and Discounts

Enter vendor terms (e.g., Net 30) when creating or editing vendor profiles. Also, track early payment discounts and apply them correctly in the “Pay Bills” screen to reduce payment amounts.

Use Recurring Transactions for Regular Bills

Set up recurring bills for fixed expenses (e.g., rent, utilities) to ensure timely recording and payment.

Reconcile A/P Reports Regularly

Use the A/P Aging Summary report to monitor outstanding balances and avoid late payments. Plus, cross-check A/P balances in reports with vendor statements to ensure accuracy.

Accounts Receivable (A/R) Management

Use Invoices and Receive Payments Features

You can use the “Create Invoices” and “Receive Payments” features instead of manual journal entries to track sales and payments.

Automate Recurring Invoices

Set up recurring invoices for customers with regular billing cycles to save time and ensure consistent cash flow.

Monitor Customer Balances

Make use of the A/R Aging Summary report to identify overdue invoices and follow up with customers promptly.

Record Credit Memos and Write-Offs Correctly

Credit Memos: Move to Customers > Create Credit Memos/Refunds and then enter details for returns or price adjustments. QuickBooks adjusts A/R automatically.

Write-Offs: Browse the Receive Payments screen to zero out the invoice and then apply the remaining balance to a bad debt expense account.

FAQs:

1. Why must every Journal Entry affecting Accounts Receivable (A/R) or Accounts Payable (A/P) require a Customer or Vendor name?

QuickBooks is a database-driven accounting system, not just a simple ledger. A/R and A/P are control accounts that hold a total balance, but the underlying detail is stored in subsidiary ledgers (the Customer and Vendor centers).

• Database Requirement: QuickBooks mandates a Customer or Vendor name to accurately track who owes the business (Customer) or who the business owes (Vendor). This links the total balance in the control account to the individual’s running balance.
• Balance Integrity: Without a name, the transaction would be recorded in the general ledger total but would not appear on subsidiary reports, such as the A/R Aging Summary or Vendor Balance Detail. This breaks the essential link between the general and subsidiary ledgers, which is critical for reconciliation.

2. When creating a Journal Entry for an Accounts Receivable adjustment, what is the required Debit and Credit logic?

The standard logic for writing off or adjusting a receivable balance involves reducing the asset (A/R) and moving the amount to an appropriate expense account.

The entry requires two balancing lines:

• Debit: Debit the Bad Debt Expense account (or similar offset expense account). This increases the expense recognized by the business, reducing net income to reflect the loss from the uncollectible account.
• Credit: Credit the Accounts Receivable (A/R) account. This decreases the asset balance, removing the uncollectible amount from the total money owed by customers.
• Mandatory Link: The A/R credit line must be linked to the specific Customer’s name to zero out their individual balance.

3. What is the key risk if a user attempts to manually correct A/R or A/P balances without using a Journal Entry name link?

The risk is creating an imbalance between the core financial reports, which leads to major audit and reporting headaches.

• Broken Reconciliation: The company’s Balance Sheet A/R or A/P figure will not match the total amount shown on the A/R Aging Summary or Vendor Balance Detail reports.
• Phantom Balances: The transaction will exist in the overall company books but will not be tied to an individual customer or vendor. The system will see the control account balance change, but the individual customer/vendor file will not, making it impossible to reconcile the specific account that was adjusted.
• Audit Failure: This mismatch is a critical failure point during any financial audit, as auditors rely on the detailed subsidiary reports to validate the control account balances.

4. What is the “Clearing” process used for in QuickBooks when managing A/R and A/P?

The clearing process addresses a specific, complex scenario where a business both buys from and sells to the same entity (a customer that is also a vendor). This is often done via two separate transactions using a temporary clearing account, as QuickBooks strictly prohibits using A/R and A/P in the same transaction.

• Purpose: The process allows the business to offset a customer’s owed balance (A/R) against a vendor’s owed balance (A/P), settling the two amounts without exchanging cash.
• Required Steps (Illustrative Logic):
  • Transaction 1 (A/P side): Debit Accounts Payable (Vendor Name linked), Credit Clearing Account (Bank or Other Current Asset).
  • Transaction 2 (A/R side): Debit Clearing Account, Credit Accounts Receivable (Customer Name linked).
• Result: The balances are offset, and the Clearing Account is returned to a zero balance, effectively settling both the receivable and the payable.

5. Why do accounting professionals advise against using Journal Entries for everyday billing and payment transactions?

Journal Entries bypass QuickBooks’ automated controls for sales tax, inventory, and customer statements, increasing the likelihood of errors and complicating reporting.

• Risk of Imbalance: JEs require manual balancing of Debits and Credits; a simple typo results in an out-of-balance transaction.
• Lost Detail: JEs do not automatically generate necessary customer documentation (like invoices or receipts), nor do they properly track item sales for inventory and cost of goods sold (COGS) reporting.
• Recommended Forms for Routine Transactions:
  • Use Enter Bills to record vendor invoices.
  • Use Create Invoices to record sales to customers.
  • Use Receive Payments to apply customer payments.
  • Use Pay Bills to process vendor payments.

6. What is the purpose of creating a reversing Journal Entry when cleaning up prior year Accounts Receivable balances?

A reversing Journal Entry is a standard accrual accounting technique used to temporarily book an expense or liability and then immediately undo it in the next accounting period.

• Temporary Accuracy: The initial JE is dated at the end of the fiscal period (e.g., December 31) to ensure the current year’s financial reports reflect the correct expense (e.g., bad debt write-off).
• Clean Slate: The reversing JE is automatically created by QuickBooks and dated for the first day of the new period (e.g., January 1). This automatically cancels the original entry, preventing the temporary adjustment from incorrectly affecting the new year’s operational results.
• Professional Guidance: This procedure is highly technical and should only be performed under the guidance of a tax accountant to prevent material misstatements across reporting periods.

7. What is the correct Debit/Credit logic for writing off a small vendor overpayment balance using a Journal Entry?

Writing off a vendor overpayment involves clearing the liability balance that represents the overage and moving that amount to a non-operating income account, which reflects the small gain to the company.

• Debit Offset: Debit an Offset Account, usually an Other Income account (e.g., Minor A/R and A/P Charge-Off Income). This increases the company’s recorded revenue or gain.
• Credit A/P: Credit the Accounts Payable (A/P) account. This is done on the second line and linked to the specific Vendor name to remove the excess liability (the owed overpayment) from the subsidiary ledger.
• Final Step: After the JE is saved, the user must apply this JE credit against the open vendor overpayment balance using the Pay Bills or Vendor Credit window to finalize the clear-out.