Startup Business Lessons: 5 Reasons to Avoid Making Adjusting Entries Yourself
Adjusting journal entries for your business can turn into a big headache very quickly. Almost any business owner who does not have an up-to-date knowledge of accounting rules and standards, plus a lot of time to organize and nitpick statements, can find themselves on the serious end of a small data entry mistake that jeopardizes the accuracy of their financials. Even some bookkeepers will outsource adjusting entries to an accountant or CPA more familiar with this task.
Let’s backtrack for a second though and cover the basics – what do we mean by adjusting journal entries?
What Does ‘Adjusting Journal Entries’ Mean in Accounting?
First off, a journal entry is any record in a business’ ledger or accounting journal for any transaction that does not run through a bank or credit card account, such as:
Miles traveled for the business
Monies that move from one account to another
An adjusting journal entry (also called an adjusting entry) is a completely separate, later record made in that same ledger, usually at the close of an accounting period. Every adjusting entry makes reference to an earlier, original journal entry. This newer record will note any expense or income that was not accounted for (either as earned or cost) in the initial journal record that it references. In other words, the second entry in this case adjusts the transaction recorded in the first so that the overall ledger represents an accurate total of what the business spent and earned.
Sounds simple enough, doesn’t it?
Unfortunately, looks can be deceiving. Outsourcing adjusting entries to a trained professional is the optimal path for busy business owners for several reasons, but here are our top five:
Reason 1: Managing Adjusting Entries Involves Lots of Paperwork and Math
Whether or not you use some sort of digital tool to assist with your business’ accounting, making adjusting entries will involve a lot of paperwork and number cross checking across various business (or personal for sole proprietors and S corporations) accounts. That’s because you need to reopen the paper trails of all the transactions that impacted your business over the time period that you’re adjusting for, to make sure that your adjusting entries present things accurately. This usually involves digging up some combination of receipts, spreadsheets, and mile or service logs, among other things.
Even with the assistance of tools like Quickbooks, which can facilitate your transaction matching across files and accounts, making adjusting entries will still involve reopening, recalculating, and potentially reorganizing a significant number of financial records of varying types.
Reason 2: Making Adjusting Entries Is Time Consuming
The reasons outlined in the point above make clear that adjusting entries will be a time consuming process. Especially for those who plan to go it alone.
Many entrepreneurs simply do not have the time to spend 2-4 hours at the end of each accounting period sorting through all of their business records to verify, recalculate, and record adjusting entries for accuracy.
Reason 3: Adjusting Entries Requires You to Understand a T Chart
Are T Charts like the one above something that you’re familiar with? If not, you’ll need to become familiar with T Chart methodology so that you can better work with and format the original and adjusting entries in your books.
Very simply put, accountants use T Chart diagrams this one to organize the double-entry transactions required in adjusting entries. Since adjusting entries involves working with various transactions from multiple business accounts, classic accounting tools like T Charts play a critical role in success.
Reason 4: When Adjusting Entries, Expenses Can Easily Get Misclassified
Mistakes like misclassifying journal entries aren’t uncommon. Unfortunately, misclassifying expenses can happen even more frequently when startup business owners overly rely on digital accounting tools. A quick, errant click can throw off the totals in two or more of your account categories, causing the need for secondary adjusting entries to be made after a first round has already occurred. In accounting, small mistakes pile up quickly.
While no miscalculation is fatal if you catch it in time, that circles back around to the second reason to avoid making your own adjusting entries – time.
Reason 5: Making Adjusting Entries Solo Offers No Guardrails or Fail Safes
As outlined here, adjusting entries contribute to the accuracy of your business’ financial records. This impacts your profits, employee payroll, and taxes due. If you operate a solo or smaller startup, it can feel like you alone have the big picture back books knowledge needed to manage this critical task. However, when adjusting entries, it’s equally as easy to miss the trees for the forest as it is to miss the forest for the trees.
We do not recommend that business owners make their own adjusting entries unless they have a well-versed record of practical accounting experience. The amount of time, paperwork, and detail involved in adjusting entries make this the accounting task we most recommend outsourcing to an expert. However, if you choose to DIY your adjusting entries, we highly recommend having a trustworthy and detail oriented source check your work.
There are lots of areas where business owners have the ability to serve their business better than any outside source or professional ever could. Unfortunately, adjusting entries is just not one of those areas. To learn more about adjusting entries, find an accountant who can manage yours, or speak with a professional who can double check your work before filing, please contact Remote Accounting Experts directly.