Adjusting journal entries may seem like an unnecessary hassle, but they’re a quick and easy way to keep your books clean and accurate.
Nobody knows better than small business owners how complicated a set of financial books can be. It’s a lot of paperwork, it’s a lot of math, and no matter how organized you are, there’s always something that slips through the cracks. That’s where the adjusting journal entry (AJE) comes in.
So, what are AJEs?
Essentially, an adjusting journal entry is a type of journal entry posted to your reports near the end of the year in order to get everything accurate, up-to-date, and easy to track.
Sometimes your accounts contain mistakes or don’t have all the information you need. Adjusting journal entries are the quickest and easiest way of fixing those errors and making sure that anyone – you, your accountant, your bank, or an auditor – has the correct version of your reports. This is especially important when it comes to your tax returns.
Where do AJEs come from?
If you’re a small business owner, you’re probably used to working with a professional to prepare your taxes. When you send over your reports, it’s very likely that your tax preparer will notice something you missed, like a miscategorized transaction or a write-off opportunity. They will update the reports on their end to reflect the new information they’re adding.
At that point, your tax pro will prepare an adjusting journal entry (or several) for you. This tells you how to adjust your books so that your version at home matches the updated version the tax professional is working with. If you’re using bookkeeping software like Xero – and you should be – it shouldn’t take long at all. If you’re working with a bookkeeper, they can even do it for you.
Not all adjustments are the same. Here’s a few of the most common types a small business owner will encounter while taking care of their taxes.
- Amortization and Depreciation: Both of these accounts track an asset’s declining value over time. Depreciation refers to hard assets (like equipment or vehicles) and amortization refers to intangible assets (like patents or trademarks). They’re treated as expenses on the income statement, which reduces taxable income. Accurate adjustments here usually mean paying less in taxes.
- Loans: Inputting loans can be tricky. Most people don’t realize that fees, for instance, should be listed as part of the loan amount. Many small businesses that received Economic Injury Disaster Loans (EIDLs) during Covid-19 ended up with small errors on the books.
- Prior year entries: Sometimes you need to post an AJE to fix an error from previous years, whether it’s a mistake in an entry or an entry that never got posted. Additionally, if it’s your first time working with a tax professional, they might be looking over reports from several years and making necessary adjustments.
- Disposal of assets: When you sell or otherwise dispose of an asset, every bit of that asset needs to come off the balance sheet. The cost of the asset, the accumulated depreciation, the gain or loss of the sale – all this information needs to be in the right spot. Sound complicated? That’s why it’s a frequent cause of adjustment.
Why do AJEs matter to me?
You need clear and accurate information to run your business
As a business owner, you want to be making decisions with open eyes and clear, accurate information. AJEs are crucial for this. If you haven’t posted the necessary adjustments, your books aren’t just out of date — they’re wrong. Posting all your adjustments at the end of the year gives the complete picture of your business’ financial health. This can show off how well you’re doing for a potential investor or reveal a hidden problem before it’s too late.
You want the best deal on your taxes
Taxes can be a major expense and getting the best deal possible on your taxes is another reason to take AJEs seriously. Many businesses are very good about tracking the classic tax-deductible expenses, like advertising, rent, or employee salaries. But you may be leaving deductions on the table.
If they’re used in the ordinary operations of your business, things like your morning coffee, your new smartwatch, or an Uber ride can be written off, potentially saving you thousands on your taxes. If you’ve missed some of these less-obvious tax deductions during the year, adjusting journal entries may be necessary to explain where these new deductions are coming from. Remember, if you don’t use AJEs to move any miscategorized expenses to the right account, you won’t be able to take the deductions. You don’t want to overpay on your taxes.
You don’t want to get audited
On the other hand, you don’t want to underpay on your taxes either. If your financial books don’t match your tax returns, it can get messy. Nobody likes being audited, and while it may not be as dire as you think, it’s still better to avoid it if you can. Taking the time to review your accounts and post the appropriate adjustments as soon as possible helps you avoid the unnecessary cost and stress of an audit. They can get expensive!
Posting your journal entries can be intimidating. Being a business owner doesn’t mean you love bookkeeping, and it can be tempting to ignore your accounts until the last minute. But if you’re worried about mistakes, don’t be. That’s what adjusting journal entries are for.
Posting your year-end AJEs is simpler than you think. With modern accounting tools, accurate and up-to-date reports are just a few clicks away. Your tax preparer can identify mistakes and prepare the entries for you, so all you have to do is enter them into the system. For many small businesses, this won’t take more than 15 minutes.
It’s simple. It’s important. It saves you money. And we can help!