Journal Entries – What, When, Why and How?

 

QuickBooks®, for ease of use, has a special form for every type of transaction: Check, Bill, Bill-Credit, Invoice, Credit Memo, Sales Receipt, Paycheck, Credit Memo, Credit Card Charge-Credit, Bank Deposit, and Journal Entry. The advantage of using the forms for the various types of transactions is that the forms are intuitive.  You’ll know how to fill them out even if you don’t understand debits and credits.  Not true for Journal Entries! Journal entries are needed for recording transactions that are not handled by the forms listed above.

In a Journal Entry, you enter the Account in the first column and the amount to be posted to that account in the Debit or Credit columns.  Use the Memo column to explain why you are entering the Journal Entry. You can enter as many lines/accounts as needed, debiting and crediting them appropriately, but to do so, you must understand how debits and credits affect those accounts.  That is, whether they increase or decrease the accounts.  Of course, you must also follow the basic rule of accounting which is DEBITS MUST ALWAYS EQUAL CREDITS in any transaction. As you enter the line items/accounts affected, they are totaled at the bottom of the form.  If the totals do not match, QuickBooks will not allow you to save the transaction until corrected.

The good news is that you rarely need to enter a Journal Entry and if you do, your CPA will usually tell you which accounts to debit and credit. A typical example is recording Depreciation Expense at year end. Your CPA will send you an entry that looks like the one below. Typically, the account(s) to be debited are listed first with the account(s) to be credited, indented and listed last.

Debit             Credit

Depreciation Expense                                   1245.00

Accumulated Depreciation                                                        1245.00

Depreciation Expense is an Expense account. Debits increase expense accounts.

Accumulated Depreciation is a Fixed Asset account (Examples of Fixed Assets are Furniture & Equipment, Vehicles, or Plows).  Depreciation decreases the value of an asset.  The older an asset is, the less it is worth.  Credits decrease Asset accounts.

We’ve created a tool to help you understand the effects of Debits and Credits on your accounts.  This will help you figure out how to enter Journal Entries.  It’s called The Debits & Credits Cheat Sheet.  You will find it at:  https://fiscalfoundations.com/the-cheat-sheet-for-debits-and-credits/

If you still have questions, email us at info@fiscalfoundations.com or call us at 612-235-3435. No charge for quick answers to questions by phone or email.

 

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