The $300,000 Mistake: How a Wrong Journal Entry Almost Cost a Business Owner Thousands

Here’s a true story from one of the very first clients I was referred to. A CPA called me in a bit of a panic. He said, “My client’s books are showing hundreds of thousands more in income than he actually earned. I know the numbers are wrong, but I don’t know where the problem is. He needs a new bookkeeper—fast.”

That phone call led me to uncover a $300,000 mistake that could have cost this business owner five figures in unnecessary taxes.

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The Situation: Inflated Income and No Answers

The business owner had a bookkeeper at the time, but let’s just say she was doing a lot of interesting bookkeeping…there were many other issues besides the inflated income, but we won’t be chatting about those today.

Here’s the problem: the reports were neatly divided out, but the totals weren’t matching reality. The owner had his own records showing what was earned, but QuickBooks was inflating his income by several hundred thousand dollars.

And when you’re staring at tax season with phantom income on your reports? That’s a recipe for disaster.

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The Investigation: Line by Line

When I came in, I knew this wasn’t going to be a quick “click and fix” situation. I rolled up my sleeves and went through the books line by line, transaction by transaction.

That’s when I found it: a journal entry moving money from a liability account into income.

And here’s the kicker—it wasn’t tied to any actual bank deposits. The money had already been recognized as income. By creating those journal entries, the previous bookkeeper had essentially double counted the revenue.

This wasn’t a one-time slip-up either. She had been doing making the same journal entry for months.

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The Fix: Deleting the Phantom Income

I confirmed my findings with the CPA and explained what I saw:

• The liability account money had already been counted as income.
• The journal entries served no purpose.
• They were inflating income by almost $300,000.

He agreed, so I deleted the faulty entries, re-ran the reports, and—voilà—the income matched exactly what the business owner said it should be, according to his reports.

Numbers that made sense. Reports that told the truth.

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The Results: Real Numbers, Real Relief

That one correction prevented the client from paying tens of thousands of dollars in taxes on income he never earned (I know, I should have asked for a bonus…)

Even more importantly, it gave him back confidence in his books. Instead of staring at bloated reports that didn’t add up, he could finally trust the numbers again.

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The Lesson: Journal Entries Are a Last Resort

Here’s the thing I tell my team all the time: journal entries are a last resort.

When your bank accounts are connected to QuickBooks, every transaction should flow through there. The rare exceptions (like correcting payroll entries, placing assets on the books, or accrual adjustments to name a few) are the only times journal entries should be used.

When bookkeepers start slinging journal entries around just to “make things balance,” it leads to inflated income, duplicate transactions, and a whole lot of IRS problems.

And let’s be honest—no business owner I know wants to send the IRS a fat check for money they didn’t even make—they don’t even want to send it for money they did make!

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Takeaway for Business Owners

If you don’t know how to spot these mistakes, you’re at the mercy of whoever is managing your books. And if they don’t know what they’re doing, it can cost you big time.

That’s why it’s critical to:

• Hire a bookkeeper who knows when (and when not) to use journal entries.
• Ask questions about why things are being entered a certain way.
• Make sure your income ties back to real, reconciled bank deposits.
• Hire a bookkeeper who understands the importance of reviewing accounts after reconciliations.
• Ask your tax professional to be sure everything ties out to the statements, too—that is the second set of eyes on everything.

Because “close enough” bookkeeping can cost you $30,000+ in taxes you don’t owe.

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Final Word

This case study was one of my first major client wins, and it reinforced what I already believed: bookkeeping isn’t just about data entry—it’s about protecting business owners from costly mistakes.

If you’re looking at your numbers and wondering, “Are these even right?” … it’s time to have someone who actually knows what they’re doing take a look.

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