Journal Entries

Summary

A discussion of the trade-offs with using Journal Entries in QuickBooks to record entries to A/R, A/P, Payroll, etc.

Question

After attending your seminars and working with various client problems I am in the habit of steering people away from journal entries in QuickBooks, especially in cash, A/R, A/P and payroll...My co-worker has a different perspective - when he works on client's books he wants an obvious trail and the journal entry is the best format. I don't disagree with that, but I always thought it lacked flexibility and "came back to bite" if you weren't careful. He says its completely flexible now and interchangeable with other types of transactions even in the modules.. So he does journal entries to void stale checks, journal entries to adjust A/R accounts and act like credit memos, journal entries in A/P. He is a very good accountant, and of course this works for the CPA firm, I worry that it can mess things up for the in-house bookkeeper if they don't know how to handle it.

Answer

This is a VERY common misunderstanding, and your instincts are correct. However, depending on what level of detail you're tracking in QuickBooks, the journal entries MAY be ok.

Journal entries are discouraged in general because they cannot affect items or payroll items. So when you use a journal entry to adjust accounts that are typically fed by items or payroll items, the item-based reports no longer match to the general ledger.

For example, if you have an open invoice and you use a journal entry to credit A/R, you'll have several problems. One, the item sold on the invoice does not get credited... What if if was inventory? What if sales tax was involved? If so, the journal entry would be completely ineffective in restocking the inventory quantity, and in reversing the sales tax detail.

If you're using QB "the way it should be used", that is... to produce management reports (item-based), sales tax reports, and payroll tax reports, then journal entries are often not the best way to adjust accounts. See our Consultant's Reference Guide for a whole section on "When to Use and Not Use Journal Entries". It starts on page 79 in the 2001 guide.