Before You Start

This guide assumes you have administrator access to QuickBooks Online and familiarity with financial statements. You’ll need access to the P&L and Balance Sheet.

Overview

20 min
Estimated Time
Intermediate
Difficulty
Quarterly
Maintenance

What You’ll Learn

  • How to identify common expense misclassifications
  • Using the Reclassify Transactions tool in QuickBooks Online
  • Distinguishing between assets, expenses, and equity accounts
  • Documenting adjustments for audit readiness

1. Common Expense Misclassifications

These are frequent errors that can distort your financial statements and tax reporting:

High-Impact Errors

  • Assets (e.g., equipment) recorded as Expenses
  • Personal Expenses entered as Business Expenses
  • Owner’s Draws classified as Business Expenses
  • Loan Principal Payments recorded as Interest Expense

Subtler Errors

  • Credit Card Payments classified as an Expense (instead of balance reduction)
  • Undeposited Funds incorrectly journaled
  • Prepaid Expenses expensed immediately

2. Identifying Misclassifications

You have two primary approaches to find these errors.

Method A: Manual Report Review

This method involves poring over your P&L and Balance Sheet.

Pros:
  • No special tools needed.
  • Good for a general overview.
  • Can reveal systemic issues.
Cons:
  • Manual and time-consuming.
  • Requires strong accounting knowledge.
  • Doesn’t directly fix transactions.

Method B: The Reclassify Transactions Tool

QuickBooks Online Accountant offers a powerful tool for efficient reclassification.

Expert Tip: We strongly recommend using the “Reclassify Transactions” tool in QuickBooks Online Accountant. It provides a centralized interface for identifying and bulk-correcting miscategorized transactions, significantly reducing manual effort and ensuring an audit trail.

This tool is designed for bookkeepers and accountants to efficiently correct multiple transactions across different accounts in one go. It’s ideal for correcting classification errors that span various dates and vendors.

3. Step-by-Step: Fixing Misclassifications

Here’s the general workflow to clean up your expense accounts.

{
  "transaction_id": "TXN-98765",
  "date": "2024-03-15",
  "payee": "Office Supply Co.",
  "original_amount": 500.00,
  "original_account": "Office Expenses",
  "proposed_account": "Office Furniture & Equipment (Asset)"
}

Example of a misclassified expense entry that needs review.

4. Using the Reclassify Tool

  1. 1

    Access the Tool

    From your QuickBooks Online Accountant dashboard, navigate to “Accountant Tools” and select “Reclassify Transactions.”

  2. 2

    Select Transactions

    Use the filters (date range, transaction type, account, payee) to locate groups of potentially misclassified entries. Focus on expense accounts for this task.

  3. 3

    Reclassify

    Check the boxes next to the transactions you want to reclassify. Then, select the correct “New Account” (and “New Class” or “New Location” if applicable) from the dropdowns at the top.

  4. 4

    Review and Apply

    Carefully review your selections. Once confident, click “Apply” to implement the changes. QuickBooks will create journal entries in the background to correct the classifications.

Common Error: Reclassifying to Incorrect Account Type

Ensure you’re moving expenses to the correct balance sheet (asset, liability, equity) or income accounts, not just another expense type. For example, moving equipment from an expense account to a Fixed Asset account is critical.

5. Testing & Documentation

Post-Correction Checklist

  • Run a new P&L and Balance Sheet report for the affected periods
  • Compare current reports with previous versions to verify changes
  • Confirm that no accounts now have unexpected negative balances
  • Document all significant reclassifications, including dates and reasons

Need Help?

Get Support

Having trouble identifying or fixing misclassifications? Our team of QuickBooks experts can help streamline your cleanup process.

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