Once upon a time, entries into the general ledger only occurred when a bookkeeper made a journal entry by hand. Since the rise of accounting software, however, these regular journal entries to record simple invoices and receipts became completely automated by the software. This helps eliminate the risk of creating unbalanced entries and saves time.
However, even aided with the latest technology, people still make mistakes. That’s why bookkeeping software allows users to create manual journal entries to rebalance ledgers after a quirky transaction or other unforeseen circumstance.
But with powerful capabilities comes great responsibility. Manual journal entries, especially when non-material, can lead to falsified records and be used to carry out fraud.
4 Key Practices for Making Journal Entries
Bookkeeping is a delicate job that is both constrained and protected by a rigorous series of controls. When bookkeepers willingly go beyond or break these controls, such as by making a manual journal entry, they will usually have a good reason to do so.
Though adding four pieces of advice may seem like heaping additional controls onto an already overflowing pile, these tips may just help clear your bookkeeper’s and your CFO’s mind.
1. Limit the Number of Journal Entries
As auditors, we’ve seen both extremes of the spectrum: some organizations that refuse to change their financial records, and others that use journal entries haphazardly, just to get their general ledger to balance.
Though manual journal entries may be required in the most obscure circumstances, they should never be the norm for balancing entries or accounts. Instead, identify and solve the underlying problem that’s causing your accounts to be incorrect rather than layering an easy solution over top. This will likely take a lot longer to achieve, but it is worth the effort to maintain your organization’s financial integrity.
2. Name and Add Descriptions
When you absolutely have to use manual journal entries, make sure to document them thoroughly. Journal entries work outside the software’s robust system of controls, which means these transactions aren’t supported unless the person making them comes up with the support manually.
Beyond proving these entries are legitimate, naming and describing them will often help the person making them remember their purpose; after a year’s worth of entries, it may be tough to remember what an old adjustment was for.
- Naming conventions: Consider applying a numbering system, whether monthly or yearly, to your journal entries. This way you can keep them straight with support files and other references.
- Descriptions: You can use the date, accounting period, name of person recording the entry, specific authorizations, and a brief description of why the journal entry is being made to help identify its place in the ledger.
3. Keep Support on File
Before you even make the journal entry, it’s a good practice to gather the documents that help prove the journal entry is necessary. Not only will this help you build a credible source when someone comes to audit your organization, but it also may help you see how to fix the issue without creating a manual journal entry.
Either way, consider either printing or storing files electronically in a “Journal Entry Evidence” folder, categorized by the name of each entry. Put invoices, insurance bills, or whatever it is that caused an issue in the folder, along with your personal explanation of why the entry was necessary.
4. Limit Software Permissions
If you’re a CFO or controller at an organization that uses journal entries too frequently, one way to prevent bookkeepers from taking the easy way out (and failing to document their decisions) is by withholding access to making journal entries in the first place.
In some organizations, the most senior-level employees can handle the few manual journal entries that are absolutely required to be made. This means staff members will either have to ask permission or instruct their supervisors to make them, reducing the overall number of undocumented journal entries.
Security Comes With Effort
Though the ease of making a manual journal entry to balance an unknown problem is tempting, this practice is more dangerous than it’s worth. Take the time to uncover the issue(s), decide whether the journal entry is still worth it, and back up your decision with your own controls so a reviewer has nothing to inquire about.
Using journal entries correctly can make for a smoother audit process, and better financial health for your organization.