What the heck are AJEs? And why do you care?
When we hand adjusting entries to clients I am often left with stunned expressions.
In this article, I’m going to explain:
What they are
How many you should have
How to process them.
Article Written for TaxWrx by Chartered Professional Accountant Jillian Battaglio.
AJEs are the keys to better bookkeeping and maybe even a better performing business.
Don't let these key indicators go unnoticed.
What Are AJEs?
Adjusting Journal Entries or AJEs for short are changes your accountant has made to your bookkeeping before preparing your corporate income tax return.
During your year-end, your accountant has gone through almost every account in your bookkeeping.
They’ve looked at:
The bank balance you’ve recorded
The equipment you’ve entered
The loan payments you’ve logged.
They’ve compared your bookkeeping entries to paperwork like bank statements, equipment receipts, and loan reports to see if errors exist.
If they noticed a difference, they’ve made an adjusting journal entry to correct the error and ensure your bookkeeping aligns with formal documentation and is accurate.
When preparing corporate tax returns many new business owners can be stunned and sometimes overwhelmed by the amount of information their accountants ask for.
I’ve heard complaints, moans, groans, and sighs.
I get it – business owners, especially small business owners are super, super busy.
You have so much on the go and 1,000 plates spinning.
The information requested creates AJEs which ensure accurate bookkeeping, lower income taxes, and CRA standards are met so you come out of audits unbloodied.
How Many AJEs Should You Have?
AJEs make your records more bookkeeping reliable allowing you to make better management decisions to have a more profitable business.
They also correct errors and provide insight into where your bookkeeping could use some tuning up.
They are a great tool to help you analyze the skill of not only your bookkeeper but also the information being provided by the business owner.
If you are both the bookkeeping and business owner, it’s a great reflection of the work you are doing.
If you have more than 5 adjusting journal entries, consider if additional training is needed for the bookkeeper or if more communication and documentation need to be prioritized by the business owner.
The Gold Standard
One bookkeeper we regularly work with has exceptional bookkeeping.
The information she provides is complete and has been reviewed in detail by the business owners.
There are very few if any errors and she is super quick in her inquiry replies.
Because of this, we often complete her year ends within 2-3 weeks and few inquiries are needed. Often, she ends up with only 4 – 6 adjusting journal entries which makes her file wrap-up super easy.
Another client of ours isn’t so lucky.
When To Consider Improvements
Both an unskilled bookkeeper and a client unwilling to provide sufficient information meant a very painful file.
Rather than 2-3 weeks their file can take 2-3 months to prepare.
Inquiries are numerous and there are lots of emails and phone calls going back and forth taking significant time.
This client may end up with 20 to 30 adjusting journal entries making the entire experience unpleasant not only for us as the accountants, but for the bookkeeper and client who have to spend hours answering questions, providing extra documentation, and fixing errors.
"The information requested creates AJEs which ensure accurate bookkeeping, lower income taxes, and CRA standards are met so you come out of audits unbloodied" – Jillian Battaglio, CPA, CA
Excessive AJEs can indicate a lack of understanding about a software program, a lack of accurate information being provided, or a lack of bookkeeping knowledge.
AJEs are the report card of your bookkeeping. More AJEs mean a lower grade and extra studying, or behaviour changes are needed.
How To Process AJEs
Once you’ve received your financial statements package from your accountant you are going to want to look for 3 documents:
The Trial Balance report
The Adjusting Journal Entries report
Reclassifying Journal Entries report (which you may not have)
Once you've gathered your reports, let's consider the date.
What Date To Use
Now that you’ve found the reports, we need to consider the date you’ll use during your data entry.
Ideally, you’ll use your year end date when processing your AJEs.
For example, if the year end your accountant just prepared was September 30, 2022, you’ll enter your AJEs on September 30, 2022.
If this is not possible and you get a program error because your file has been ‘rolled forward’, enter the AJEs on the 1st day of the next year with any income statement accounts (income or expense items) being posted to ‘Retained Earnings’.
Using our previous example the date to pick would be October 1, 2022.
Posting your income statement items to retained earnings mimics the year end processes your software program goes through and is a workaround if you can’t use your year end date.
Entering Your AJEs
Next, we can start to enter the AJEs into our bookkeeping program.
Grab hold of the Adjusting Journal Entries and let's get started!
For QuickBooks Online, AJEs should be entered through the Journal Entry function with customers or clients selected when mentioned in the AJE description.
If you are using a desktop program, you’ll use the General Journal Entry function for most entries with the Receivables or Payables function used when specific customers have been identified.
To help identify your AJEs I’d recommend setting the journal number as AJE1, AJE2, and AJE3 in your bookkeeping.
Now, each bookkeeping program is going to have slightly different processes, so we created a handout to lead you through the steps of the most common software brands.
Check that out on our website membership platform for more information.
As a quick tip: Entering each AJEs individually rather than as one big transaction can make it significantly easier to find data entry errors.
I’ve been kicking myself many times when trying to find a trial balance error and wishing I had entered each AJE separately.
When Your Done (The Answer Key)
When you are done, you’ll want to check that you’ve entered your AJEs correctly.
To do this you’ll compare the Trial Balance report provided by your accountant to the trial balance available in your bookkeeping software.
The Trial Balance report is like an answer key to a test and is a great resource.
Sometimes the ‘Reclassifying’ entries may cause a variance.
Reclassifying Journal Entries are prepared by your accountant for financial statement disclosure purposes. They aren’t always prepared and don’t have to be entered into your bookkeeping software.
If you have reclassifying entries, you need to calculate the account balances without the reclass entries to get the right answer.
What If You Have An Outage?
At the end of your comparison if you have an outage, double-check your data entry. 90% of the time you’ll find your error there.
If you are still having issues, consider if you entered transactions that were dated during your fiscal year into your bookkeeping software after giving your bookkeeping to your accountant.
This means your accountant would not have included this information in your tax return because it was entered after they received the official records.
The fix is searching for these transactions by using look-up functions or transaction date reports and then moving these transactions forward to the next year-end.
This is an option if the receipt is small and relatively insignificant.
For example, if your year end date is September 30 and your $50 receipt has a date of September 27, try changing this receipt to October 1st to see if it fixes your trial balance variance.
If the receipt is more than $1,000 reach out to your accountant for further guidance.
If you continue to have issues, your accountant can reconcile your bookkeeping (usually for a fee), or you can leave the variance outstanding, and it will be reviewed during your next year-end services.
That's A Wrap
All right, that is all I have for today. I hope you found this article helpful and that you feel confident working with your adjusting journal entries.
If this topic has interested you, be sure to check out our other blog articles and consider subscribing to one of our membership plans so you can be a well-informed business owner.
Article Written for TaxWrx by Chartered Professional Accountant Jillian Battaglio.