In double-entry accounting, both sides of any transaction have to balance, as the transaction in Figure 16-1 shows. When you move money between accounts, you increase the balance in one account as you decrease the balance in the other—just as shaking some money out of your piggy bank decreases your savings balance and increases the money in your pocket. These changes in value are called debits and credits. If you commit anything about accounting to memory, it should be the definitions of debit and credit, because these are the key to successful journal entries, accurate financial reports, and understanding what your accountant is talking about.

Figure 16-1. For each transaction, the total in the Debit column has to equal the total in the Credit column. To transfer money from one income account to another, you debit the original account (decrease its income) and credit the new account (increase its income).

Table 16-1 shows what debits and credits do for different types of accounts and can take some of the pain out of creating journal entries. For example, buying a machine is a debit to the equipment asset account because it increases the value of the equipment you retain. A loan payment is a debit to your loan account because it decreases your loan balance. And (here’s a real mind-bender) a credit card charge is a credit to your credit card liability account because purchases on credit increase the amount you owe.

As you’ll see in examples in this chapter, you can have more than one debit or credit entry in one journal entry. For example, when you depreciate equipment, you can include one debit for depreciation expense and a separate credit for the depreciation on each piece of equipment.

Here are a few of the more common reasons that businesses use journal entries:

Figure 16-2. When you use journal entries to create opening balances, you have to adjust the values in your equity account (like Retained Earnings) to reflect the omission of AP and AR. Now you can create your open customer invoices and unpaid vendor bills to build the values for Accounts Receivable and Accounts Payable. When your AP and AR account balances match the values on the trial balance, the equity account will also match its trial balance value.

In essence, every transaction you create in QuickBooks is a journal entry. When you write checks, the program balances the debits and credits behind the scenes.

To explicitly create QuickBooks general journal entries, you first need to open the Make General Journal Entries window using any of the following methods:

Here are the basic steps for creating a general journal entry in QuickBooks:

If you stare off into space and start mumbling “Debit entries increase asset accounts” every time you create a general journal entry, it’s wise to check that the general journal entry did what you wanted. Those savvy in the ways of accounting can visualize debits and offsetting credits in their heads, but for novices, thinking about the changes you expect in your profit and loss report or balance sheet is easier.

For example, if you plan to create a journal entry to reassign expenses in the Uncategorized Expenses account to their proper expense account homes, you’d expect to see the value in the Uncategorized Expenses account drop to zero while the values in the correct expense accounts increase. Figure 16-4 shows how you use a profit and loss report (see Understanding the Profit & Loss Report) to check your general journal entries.

Figure 16-4. Top: Before you create your general journal entry, review your Profit & Loss report to look at the accounts that you expect to change. Here, the Uncategorized Expenses account has $28,000 in it. The Employee Benefits account, which is one of the destinations for your uncategorized expenses, has $3,000. Bottom: After the general journal entry reassigns the expenses, the Uncategorized Expenses account decreases, as you’d expect, and the Employee Benefits account increases.

As you work with your QuickBooks file, you might realize that you want to use different accounts. For example, as you expand the services you provide, you might switch from one top-level income account to several specific income accounts. Expense accounts are also prone to change—when the Telephone account splits into separate accounts for landline service, wireless service, and Internet service, for example. For that matter, any type of account is a candidate for restructuring, as one building grows into a stable of commercial properties or you move from a single mortgage to a bevy of mortgages, notes, and loans.

Reassigning Jobs

If you need to transfer money between different jobs for the same customer, general journal entries are the answer. For example, your customer might ask you to apply a credit from one job to another, because the job with the credit is already complete, so your customer wants to apply that credit toward a job that’s still in progress.

Figure 16-5. Top: When you transfer money between income accounts, you debit the original income account to decrease its value and credit the new income accounts to increase their value. Bottom: Expense accounts are the opposite. You credit the original expense account to decrease its value and debit new expense accounts to increase their value.

When you move money between jobs, you’re transferring that money in and out of Accounts Receivable. Because QuickBooks allows only one Accounts Receivable account per journal entry, you need two journal entries to transfer the credit completely. (Figure 13-10 on Setting Up QuickBooks for Prepayments shows what these journal entries look like.) You also need a special account to hold the credit transfers. An Other Expense account called something like Credit Transfers will do. After you have the transfer account in place, here’s how the two journal entries work:

• Transfer the credit from the first job to the transfer account. In the first journal entry, you debit Accounts Receivable for the amount of the credit. Be sure to choose the customer and job in the Name field. This half of the journal entry removes the credit from the job’s balance. In the second line of the journal entry, choose the transfer account. The amount is already in the Credit cell, which is where you want it for moving the amount into the transfer account.

• Transfer the money from the transfer account to the second job. In this journal entry, debit the transfer account for the money you’re moving. Then, the Accounts Receivable account receives the amount in its Credit cell. In the Name cell, choose the customer and the second job. This journal entry transfers the money from the transfer account to the second job’s balance.

When you own an asset, such as the deluxe Cat-o-matic cat herder, the machine loses value as it ages and clogs with furballs. Depreciation is an accounting concept, intimately tied to IRS rules, that reduces the value of the machine and lets your financial reports show a more accurate picture of how the money you spend on assets links to the income your company earns. Typically, you’ll calculate depreciation in a spreadsheet so you can also see the asset’s current depreciated value and how much more it will depreciate.

But depreciation doesn’t deal with hard cash, which is why you need to create a general journal entry to enter it. Unlike some other general journal entries with a wide choice of accounts, depreciation journal entries are easy to create, because the accounts you can choose are limited. The debit account is an expense account, usually called Depreciation Expense. (If you don’t have a Depreciation Expense account, see Creating an Account to learn how to create one.) The offsetting account is the account for the fixed asset that you’re depreciating.

For a depreciation general journal entry, you want to reduce the value of the fixed asset account and add value to the Depreciation Expense account. If you remember that debit entries increase the value of expense accounts, you can figure out that the debit goes with the expense account and the credit goes to the fixed asset account. Figure 16-6 shows how depreciation debits and credits work.

Figure 16-6. If you have several assets to depreciate, you can add a credit line for each asset. In this case, the Depreciation Expense debit is the total of all the depreciation credits.

If you run your business from your home, you may want to allocate a portion of your utility bills, homeowners’ insurance premiums, repairs to your home, and other home-related expenses to your company. The money you spent on home office expenses is already out the door, but those expenditures are equivalent to personal funds you contribute to your business. To show this contribution in QuickBooks, you credit the total expenses for your home office to an equity account for your owner’s contributions to the company. Then, you debit expense accounts for each type of home office expense, as shown in Figure 16-7.

Figure 16-7. After you credit the owner’s contribution account and debit the home office expense accounts, your home office expenses show up in a “Profit and Loss” report (Understanding the Profit & Loss Report) and your owner’s contribution appears on the Balance Sheet (The Balance Sheet).