I will adamantly tell most QuickBooks professionals and home users that they should keep away from General Journal Entries (GJE's) when possible. However, sometimes it's required
to make multiple GJE's to get balances in QuickBooks to agree and apply correctly. The most common instance I use GJE's to clear out accounts is when I need to apply credits to vendors and customers.
What is a clearing account? A clearing account helps act as an intermederiary to transfer funds from one customer job or vendors account to another. For instance, if the vendor Alphabet ABC has an invoice open for $100 in accounts payable (money you owe them) but is also a customer and has an open invoice for $100 in accounts receivable (money they owe you) the two invoices should effectively $0 each other out. A problem now arises because QuickBooks does not have a way to make the two apply against one another to show them as paid. Another issue also appears when you have credits for customer jobs and they need to be applied to a different job that was originally credited.
Credit a Vendor That Is Also a Customer - As stated before sometimes you may have a vendor also be a customer in QuickBooks. The idea is that you want to offset the invoices in QuickBooks to give you the correct amount due either on the customer side (AR) or vendor side (AP). ABC Alphabet (Vendor) has charged an invoice to your company for $100 but also owes your company $150 from an invoice you've charged them giving your company a total of $50 now owed to you. To properly credit accounts here's how it works:
1.) If you don't already have a clearing account create an Other Current Asset account called 'Clearing Account'
2.) Create a GJE to move the $100 from Accounts Payable to credit to the clearing account. The GJE would have one line for Accounts Payable with a $100 debit, make sure to put the vendor name in the name field on this line. You would then credit $100 to Clearing Account.
3.) Create a GJE to move the $100 from Clearing Account to the customers invoice in Accounts Receivable. The GJE would credit Accounts Receivable with a $100, don't forget to put the customer name in the name field on this line. You would then debit $100 to Clearing Account.
4.) Apply the GJE in Accounts Payable by clicking the bill to be paid then select Set Credits to pay the bill.
5.) Apply the GJE in Accounts Receivable by going to the invoice you've created for the customer and apply the credit.
Apply Credits to Other Jobs - The most common case I use clearing accounts for is when a
customer has multiple jobs and credits need to be applied from one job to another. For instance, if customer Joe Smith gave you $1,000 for Job One but your company made a mistake during the work you may issue Joe Smith a $200 credit for Job One. Joe Smith then requests another work and you charge Joe Smith $1,000 for Job Two. Joe Smith now only pays $800 for Job Two because he has an open credit of $200. To correctly apply this credit to Job Two we need to use a clearing account.
1.) First, create a GJE to move the $200 Credit from Job One to the clearing account. The GJE would first debit Accounts Receivable $200 with the name line being Joe Smith:Job One. You would then credit Clearing Account $200.
2.) Second, create a GJE to move the $200 from the clearing account to Job Two. The GJE would first credit Accounts Receivable $200 with the name line being Joe Smith:Job Two. You would then debit Clearing Account $200.
3.) Lastly, go to Job One and Job Two to apply both of the GJE's to the credit in Job One and the invoice in Job Two.
How To Manage the Clearing Account - A clearing account is just like an Opening Balance Equity account, the balance needs to be kept at $0. After every time you work in the clearing account I would advise you to reconcile the account to $0. If the clearing account has a balance after the GJE's, you've done something wrong and you need to investigate what happened.
That's about the basics of clearing accounts. Different situations may arise where a clearing account is needed but the concepts are the same. Move amounts via GJE's and ensure the clearing account stays to a $0 amount at all times.
