4 Accounting Transactions that Use Journal Entries and How to Enter them in QBO

Accounting software has come a long way in the past few years. Although a good bookkeeper can be invaluable, It has become fairly easy for business owners and their support staff to take on the responsibility of entering day to day transactions while they employ accountants for the more complex aspects of their accounting and tax. While entering the majority of transactions in software, such as Quickbooks Online is fairly straightforward, there are transactions that require somewhat special treatment discussed below:

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What is a Journal Entry and How to Enter it:

Without taking you through an accounting seminar, suffice it to say that a journal entry is a way to record a transaction when the transaction is somewhat unspecific, outside of the normal course of operations or in the interest of time and efficiency. 

To better understand this it helps to understand other transaction types that are not journal entries in Quickbooks Online:

• A sales transaction is entered through invoices/receive payments

• An expense transaction is entered through expenses/make payments

• A bank transaction is entered through the banking tab

• Payroll is entered through the employee tab

A journal entry is often used for transactions that only happen occasionally and as such there isn’t necessarily a separate designated journal for them (such as sales or expenses). It is also a tool used by accountants to enter year end adjustments or provisions or to combine a series of transactions, which can be a bit more complicated.

To create a journal entry in QBO, you would click on the “+” (plus) sign in the top left corner and in the 4th column, under “other”, select journal entry.  You would then enter the date, which is often the year end or period end date of the business and proceed to enter the accounts for the transaction.  Each transaction needs at least one debit and one credit, however, there can be an unlimited number of debits and credits .  For example a transaction for opening balances might have many line items.  Also audit adjustments might all be reflected in one journal entry with several lines and numerous accounts.

how to record shareholder loans (payable and receivable):

Shareholder loan payable i.e. the company owes the shareholder money occurs when the shareholder either a) loans money to the company , b)transfers assets like computers, inventory and/or other assets, c) pays themselves a dividend or a salary but chooses to retain the funds that they should have received as net salary or dividends in the company to be repaid at a later date or incurs expenses.  In this case the best way to record this is as follows:

• Set up a new account in the chart of accounts called “shareholder loan”.  The account type in QBO is current liability account (on the balance sheet) while the detail type is short term borrowings from related parties.

• If the funds have come in to the bank account from the shareholder it can simply be allocated as a deposit or a transfer to the shareholder account (no journal entry necessary).  A deposit is a little more flexible than a transfer as you can show the name of the shareholder but otherwise a deposit and a transfer in this case  are functionally the same.

• If there is no cash impact of the transaction but rather the shareholder is transferring assets to the corporation, you would then record a journal entry:

Debit: Asset (eg. computer equipment, inventory, furniture etc)

Credit: Shareholder loan

• The journal entry for dividends paid (and reflected on a T5/RL3) for the year that are reinvested into the company would be shown as:

Debit: Dividends Paid (this is an Equity account that should be set up if it doesn’t already exist)

Credit: Shareholder Loan

A shareholder might want to take a nominal amount of dividends during the year to smooth out tax owing in future years,. but then reinvest them in the company.

Shareholder loan receivable i.e. the shareholder owing the company money is a more common situation and usually occurs when the shareholder withdraws funds from the company which they might later either take as a dividend or repay to the company. 

• Use the shareholder loan account created per instructions above.  Even though this is technically a liability account it is better to have one shareholder loan account where all transactions can be offset against each other. If there is a shareholder loan receivable by the corporation from the shareholder, there will be negative liability.

• Shareholder loan accounts only apply to corporations. Sole proprietorships would have an owner’s equity account which would be set up as an equity account rather than a liability. In this case dividends are not applicable.

• The payment from the bank account would be categorized as an expense or a transfer to the shareholder loan account

• If dividends are declared and paid, then the entry to clear it out of the shareholder loan account is:

Debit: Dividends Paid (Equity Account)

Credit: Shareholder Loan

• It is important to note that special rules exist around shareholder loans (receivable) that are payable by the shareholder to the company.

How to record corporate tax expense, payments and interest/penalties:

If your business is profitable, you usually have to pay corporate taxes at the end of the year.  Additionally, depending on the amount of corporate tax you might also have to pay quarterly or monthly tax instalments.  If payments are made after certain due dates, interest and/or penalties on corporate income tax might also apply

Although there are complex rules under GAAP for how to calculate and reflect income taxes, most companies can usually record the amount payable and corresponding expense as determined on their tax return.

To record corporate income taxes, two new accounts should be created from your chart of accounts:

1. Income tax expense which is an expense account (I like to use “other expense” for this account type so that it shows under all other expenses on the profit and loss statement)

2. Income tax payable which is a current liability account.

The corporate tax expense from the tax return is simply recorded as a journal entry on the year end date of the corporation as follows:

Debit: Income tax expense

Credit: Income tax payable

When payment of the corporate income taxes is made, generally several months after the year end:

• From the banking download in QBO, categorize the payment as a payment/expense  to income tax payable (remember you have already set up the expense so you don’t want to duplicate it) and indicate the name of the revenue agency to whom it is being paid

• If the payment amount exceeds the expense amount due to interest and/or penalties, you would “split” the transaction in the banking download , create a new expense account for “interest and penalties” and categorize the appropriate amounts to the interest and penalties account, while the balance is allocated to income tax payable. This will clear out the income tax liability account if the full amount of the balance is paid.

If you are entering the corporate tax expense as a journal entry:

Debit: income tax expense

Credit: income tax payable

When making payment of the corporate tax payable:

Debit: income tax payable (reduce the liability)

Debit: interest and penalties (if applicable)

Credit: Bank account from which the payment is made (for the full amount of the payment)

How to Record Home office expenses:

Shareholder/employees of corporations and owners of sole proprietorships may be entitled to a home office expense deduction under certain circumstances.  If you qualify:

Create a spreadsheet that list 100% of  the following home office expenses for the year including:

• Rent

• Condo fees

• Interest portion of the mortgage payable

• Utilties

• Property and School Taxes

• Insurance

• Property maintenance (eg. cleaning lady or gardener)

• Repairs to the property as a whole

• Telephone

• Internet

On the spreadsheet indicate the percentage of the home that relates to the home office portion only and multiply by the total amount above to get the home office expense for each category

Set up each category above in the chart of account as an expense.  Each category can also be listed as a sub category of home office expenses for further clarity.

Create a journal entry as follows:

Debit:  Rent, Condo fees, Insurance etc. (each category on a separate line with the corresponding amount that relates to the home office. This can all be one journal entry.)

Credit: Shareholder Loan (the exact total of  home office expenses can then be paid out to the shareholder)

Sales tax can also be entered in a journal entry.  For example telephone, internet and hydro all have sales tax.  To do this determine the amount of home office expense per the formula above but before sales taxes. 

When entering the journal entry, scroll to the right and find the sales tax column.  Then select the code that applies to your province.  This will allocate the sales tax to the sales tax report.

How to Record depreciation expense and Accumulated Depreciation:

In this tutorial we will look at what are fixed assets and how to enter them as well as the impact on the Balance Sheet. We then review the two most popular depreciation methods, how to calculate the depreciation using the declining balance method which is used by Revenue Canada (CRA) with a spreadsheet and how to enter depreciation in QuickBooks Online. Finally we will review the impact on the profit and loss and balance sheet.

Certain high value purchases of assets, that have a  useful life beyond one year, like computers, printers, cell phones, furniture, photography equipment, machinery etc are recorded as capital assets (property, plant and equipment) on the balance sheet rather than expenses on the profit-loss.  They are then depreciated over time using one of several methods.  The method to calculate depreciation used by Revenue Canada (CRA) is the declining balance method.  Each asset is assigned to a specific CCA (capital cost allowance) class which has a pre-determined rate.  For example computers and related purchases are Class 50 while furniture and photography equipment would be Class 8 with a 20% depreciation rate. 

The depreciation calculation is based on the Undepreciated Capital Cost , which is the cost of the assets less any depreciation taken in prior years.  In the first year, the half year rule is applied which means that only 50% of the depreciation is allowed.  See an example of how CCA is calculated

Note that other methods of depreciation can be taken for financial statement purposes including straight line or units of production if this gives a more accurate view of the usage of the asset.

To record the journal entry in QBO:

Set up an account for depreciation expense.  You can either set up an account for each category of asset eg. depreciation computer equipment, depreciation furniture etc. OR you can set up one combined expense account.

QBO has this as an “Other expense” when scrolling through detail type, however, it might make more sense to show this an “expense” since it is part of operating expenses. For detail type, you can use other general/administrative expense

You would then create accounts for accumulated depreciation for each asset.  This allows you to monitor the depreciated value of each asset.  The accumulated depreciation asset account is a “contra” account since it will always have a negative balance while assets are usually positive.  The account in QBO would be created as a “property, plant and equipment” account where you would selected accumulated depreciation as the detail type.  When name the account it is common practice to call it accumulated depreciation (depn) – computer or furniture etc. depending on the category of asset to which it applies.

The journal entry for depreciation is simply:

Debit. Depreciation Expense

Credit. Accumulated Depreciation

 Recording a journal entry, while usually under the purview of accountants, can also be done by business owners and support staff, particularly for simple transactions like the ones listed above. It should be noted that if you are not sure about how to enter a journal entry or if there is some complexity to the transaction it is better to consult your accountant rather than making an incorrect entry which can misstate your financial statements and cause a chain of issues.  

Ronika Khanna is an accounting and finance professional who helps small businesses achieve their financial goals. She is the author of several books for small businesses and also provides financial consulting services.

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