Cleaning up old transactions in Quickbooks, with a note on trade accounts

I came across a question today on Intuit's forums about how to clean up old open balances, both for vendors and for customers, without messing up the financial statements. This is something I've been meaning to write about for a while, but I haven't gotten around to it until now. So here is at least the first part of Backyard Bookkeeper's guide to cleaning up old mistakes. First of all, if you decide to use this method, it means you've given up all hope of cleaning it up the "right way," that is, going back in time, figuring out what the original mistake was, correcting it, and then working forward again. **IMPORTANT** I forbid you to use the following clean-up technique unless you make a solemn pledge to never use it again after today. In the future, you must fix any subsequent mistakes the right way, in a timely manner, so that further clean-up will not be necessary. That said, let's move on. We'll deal with accounts receivable first. Suppose you have a customer, Jack and Jill Jones, and for some reason Quickbooks always shows that they have an open balance of $171.00. They are good payers in all other respects, so that's not the problem, and this open invoice in question is from six years ago and has a partial payment applied. All the relevant paperwork is deep in storage, all the relevant taxes have been paid on the income, etc., etc., so you just want that $171 to go away. Create the following general journal entry: Open the "Receive Payments" window from the Customer menu and type in "Jack and Jill Jones." Select the open invoice that you want to cancel out and click the "Discount & Credits" button. The general journal entry you just created will appear as a credit. Make sure it's checked, click "Done," then save and close the payment window. Voila! The open balance has disappeared from the customer summary view and from all accounts receivable reports! A few additional notes: If the open balance is due to bad debt, ie customers disappearing or going bankrupt, create a "Bad Debt" expense account and use it instead of the reconciliation discrepancies account. If you know something about why or how the original mistake happened, either create an appropriate expense account or make good notes in the memo lines of the general journal. If the customer for some reason has an open payment and therefore a negative account balance, making it look like you owe them a refund, then reverse the debits and credits in the above sample journal. Then locate the open payment , and the general journal entry will now appear in the open invoice list below and you can apply the payment to it and cancel it out. You can handle old open vendor balances similarly. You have a good relationship with Grainger, one of your vendors, and their statements to you show that your account with them is current, with no open balances older than 30 days. But your Quickbooks file shows an open bill dated 4/1/99 with a balance of $570.00 for thirteen obselete widgets. No one in the office knows anything about it and there are no said widgets in the warehouse. Here's how you get rid of the bill: Create the following general journal entry: Open the "Pay Bills" window from the Vendor menu. Select the open bill that you want to make go away, check the box to pay it, and then click the "Set Credits" button. The journal entry you just created will appear as a credit. Check the box next to the credit, click "Done," verify that the amount to pay column shows zero, and click "Pay Selected Bills." Voila! The open bill has disappeared from the vendor summary views, the pay bills window, and all accounts payable reports. A few additional notes on both cleaning up accounts payable and receivable: If the vendor balance is negative, that means that somewhere along the line you made a bill payment for which a bill no longer exists. Create a journal entry just like the one above, but with the credits and debits reversed. Then locate the open bill payment and apply it to the journal entry, which will now appear in the open bill list. This technique is handy for keeping your trade accounts clean. If you provide housekeeping services, for example, in exchange for auto repair, then the correct way to account for the trade is to invoice the mechanic for your services and enter his charges to you as a bill. (This is good anyway because often the amounts don't match exactly and one of you may still owe the other.) You will need to make two journal entries, just like above, because Quickbooks doesn't allow you to have more than one line of accounts receivable or payable in any one entry. I might use "miscellaneous expense" to pass this through, rather than "reconciliation discrepancies." If you can use something more specific than "reconciliation discrepancies," then please do. Bad debt, for example, is something that you can write off, whereas reconciliation discrepancies aren't deductible. Also, put all the information you do have about the adjustments in the memo lines of the journal entries. This will help your accountant when he/she does your taxes, and it will help you remember what you did when you come across it later.