Adjusting Journal Entries and the General Ledger

Why Adjusting Journal Entries Matter

At the end of an accounting period—most often the fiscal year—the books do not yet tell the complete financial story. Revenue and expenses that belong to the period may not have been recorded, and some items already recorded may need to be reallocated. Adjusting journal entries (AJEs) are the corrections and additions made before financial statements are finalized. Without them, the income statement and balance sheet will be inaccurate, and any business decisions or tax filings built on them will be flawed.

In QuickBooks Online (QBO), adjusting entries are entered through the + New → Journal Entry screen. Each entry debits one account and credits another, keeping the accounting equation (Assets = Liabilities + Equity) in balance. After you save the entries, you can verify them by running the General Ledger report, which shows every transaction posted to every account.

The Five Standard Year-End Adjusting Entry Types

1. Depreciation

Long-lived assets—equipment, vehicles, furniture—lose value over time. Depreciation spreads that cost across the asset's useful life. Each period you record:

• Debit: Depreciation Expense
• Credit: Accumulated Depreciation (a contra-asset account linked to the fixed asset)

The amount comes from a depreciation schedule, which lists each asset, its cost, useful life, and the current-period expense. In QBO, Accumulated Depreciation appears as a negative balance under fixed assets on the balance sheet.

2. Prepaid Expenses

When a business pays for something in advance—insurance premiums, subscriptions, rent—the payment is first recorded as a prepaid asset. As time passes, the used portion becomes an expense. At period end:

• Debit: Insurance Expense (or the appropriate expense account)
• Credit: Prepaid Insurance (or the appropriate prepaid account)

Use the prepaid amortization table in your packet to find exactly how much has been used during the period.

3. Accrued Liabilities

Some expenses are incurred before a bill arrives or before cash is paid—wages earned by employees in the last few days of December, for example, that will be paid in January. To match the expense to the correct period:

• Debit: Wages Expense (or the relevant expense)
• Credit: Accrued Liabilities (or Accrued Wages Payable)

This entry creates a liability on the balance sheet showing the business owes money as of the period end date.

4. Inventory Adjustment

A physical count at year end often differs from the quantity shown in QBO. If the count reveals shrinkage, damage, or counting errors, the books must match physical reality:

• Debit: Cost of Goods Sold (or Inventory Shrinkage Expense)
• Credit: Inventory Asset

If inventory is over (books show less than the count), the entry is reversed. In QBO, you can also use the Adjust Quantity on Hand feature for inventory items, but the underlying journal entry follows the same debit/credit logic.

5. Owner Draw

In a sole proprietorship or partnership, when the owner withdraws cash or assets for personal use, it is recorded in an Owner's Draw account (an equity account). At year end, the draw balance is typically closed into the Owner's Equity account:

• Debit: Owner's Equity
• Credit: Owner's Draw

This closes the draw account to zero and reduces total equity to reflect the withdrawals made during the year.

Entering a Journal Entry in QBO

1. Click + New in the left navigation bar and select Journal Entry.

2. Set the Journal Date to the last day of the accounting period.

3. In the first line, choose the account to debit and enter the amount in the Debits column.

4. In the second line, choose the account to credit and enter the same amount in the Credits column.

5. Add a Memo describing the adjustment (e.g., "Dec 31 depreciation – office equipment").

6. Click Save and close.

QBO will not allow you to save an entry that is out of balance. The totals of Debits and Credits must match exactly.

Verifying with the General Ledger Report

After entering all five adjusting entries:

1. Go to Reports and search for General Ledger.

2. Set the date range to include the period end date.

3. Use the Filter option to display only the accounts affected by your adjustments.

4. Check each account's ending balance against the answer sheet provided in your packet.

A rounding difference of up to $0.01 is acceptable due to the way QBO handles decimal cents, but any larger discrepancy means an entry amount or account selection is wrong.

Accuracy and Data Integrity—Your Safety Net

In bookkeeping, accuracy is the primary safeguard. Incorrect adjusting entries can overstate or understate taxable income, mislead lenders, and create legal liability for the business. Follow these practices every time:

• Work from a printed or locked source document (depreciation schedule, amortization table); never enter amounts from memory.
• Double-check that debits equal credits before saving.
• After saving, always run the General Ledger to confirm posting—do not assume the entry is correct just because QBO accepted it.
• Keep a log of all adjusting entries made, including dates and the name of the person who entered them; this supports audit trails.
• Never delete a posted journal entry to fix a mistake—use a reversing entry or correcting entry so the audit trail is preserved.