 QuickBooks Online 2023. Adjusting entry accrued interest. Get ready to start moving on up with QuickBooks Online 2023. Here we are in our Get Grid Guitars Practice file. We started up in a prior presentation using the 30-day free trial. We also have open the free QuickBooks Online sample company. If you want the to open at the same time, you can use Incognito. Support accounting instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Or another browser. You can open Incognito if using Google Chrome with the three dots in the browser. Incognito window type in the search engine. QuickBooks Online Test Drive. We're going to use the sample company to compare the accountant view, the one get great guitars is in and the business view, the one the sample company is in. You can toggle between the two by going to the cog up top, switch the view down below. Duplicating some tabs like we do every time. Right click in the tab up top to duplicate it. Right click in the tab up top to duplicate again, back to the middle while the right is thinking. And we're going to go to the reports on the left. Open up the balance sheet again, again. By the way, if you're in the business view, the reports are located in the business overview. And then the reports on the left hand side back to the tab to the right reports on the left. And then the profit and loss in the middle closing the hand boogie up at the top left. And then in the middle kind of upper left section, we're going to change in the range in 010123 to 022823 hitting the drop down, but not too hard with the months and running it. So we got the side by side. Then we're going to go to the tab to the left, close up the hamburger and change the range. We're going from 010123 to 022823 tab. Let's hit the side by side. I'm not one as well with the month by month break down, run it to refresh it. There we have it. We've been talking about the adjusting entries last time. We're going to be looking at the specific adjusting entry this time related to interest. So that's going to be dealing with one of our issues with the loans down below. So we're looking at these loans. I'm going to say the cutoff date is February 28th. Oftentimes you might see a cutoff date as the year end cutoff date. We're trying to make our financial statements correct as of this point in time. And one of the issues with the loans might be that we had some interest that has been incurred that we have not yet recorded. And interest can be a little bit of an abstract concept. It's a little bit more concrete. A lot of times in people's minds, you can imagine if you're renting a building, for example, you got your office building there. And for whatever reason, you were able to negotiate a deal with your landlord saying, I'm going to use the building for the next year and I won't pay you until after that time, the year after I've used it, right? After it's been used for a year, then I'll pay you after that. And if you obviously deals like this, you can imagine them happening as long as you paid them enough money to be paying them at a later point in time and they trusted you and so on. And in that case, you would say, well, if you report the expense after you use the building, then it's not exactly correct because you consumed the use of the building from an accrual standpoint in the prior year. So if you report the expense in the following year, you have a timing difference. You would think you would have to report the expense of consuming the building when you used it. The same can be said for the interest. Interest is basically rent on the purchasing power of the money. You've got money so that you could buy property, plants and equipment and generate revenue on it. And if, and if, if they, if they, when you pay back the rent on the money, if you've consumed some of the purchasing power, you should be applying the rent on the money, the interest to the same period that you used to consume it. That's the basic concept that we're going to here. Now to think about this, we're going to construct an amortization table, which is a little bit different than a standard amortization table, just so we can get a good feel for this. This might be going a little bit overboard. You don't have to construct an amortization table all, all the time, but it's useful to get an idea of what's happening. So we're going to go to Excel, construct our amortization schedule. We'll do it fairly quickly since this is not an Excel course. Okay, so I'm going to put the data on the left hand side. So we have the loan balance, the months, we'll say, months of the loan, which could be the periods, because it's going to be less than a year. We'll say the rate that we're going to have, and then the payments that we're going to make. Let's format the entire worksheet now. I'm going to put my cursor on the triangle and put my ground line or baseline formatting the whole sheet selected, right clicking on it, formatting the selected sheet. Then I'm going to go down to currency. I usually go to bracketed red numbers for negatives, get rid of the dollar sign, and let's keep the decimals. We'll keep the decimals in place and say, okay, and then I'm going to make it bold so that hopefully that stands out when we're doing the recording. Notice I put all this stuff on line five instead of line one, which is where I wanted it. So I'm just going to delete rows one to four, selecting those rows, right clicking and just delete those. So we've got the information up on a one to start with because that makes sense. Okay, so then I'm going to say that the loan is for 5,000. That's what we took the loan out when we financed our equipment for. And let's say it was just for a three month loan. We're just going to make it a small loan because I want to make the numbers a little bit more significant for our adjusting entry. I'm also going to make the interest rate quite high because I want to make it significant for our accrual entry here. So I'm going to say percent and then the payment. I'll do a calculation for the payment just to show you how you can calculate the payment. Oftentimes when financing the equipment, they would give you the calculation of the payment, but not that might not be so clear about the rate, for example, or or, you know, you could back into the end of these other two items if you knew the payment amount. And so whenever you're dealing with a loan person, the financing department, you probably want to make sure that you're thinking through things yourself, right? And so that you fully understand all the components that are involved because those finance departments cannot, can be a little, a little, little scammy sometimes. So in any case, so I'm going to say negative PMT. That's the payment calculation. We're going to pick up the rate, which is going to be up one. That's going to be B three. That's a rate for a yearly rate. We're going to imagine that's a yearly rate, right? Which is normally what people talk in when they think about rates, yearly rates, I got to break it down to divided by 12, a monthly rate, comma, the number of periods is just three that is in months now. So I don't need to divide by 12. That's not three years, three months. So now the rate is tied out to the same period structure as the number of payments, comma, the present value, that is going to be the 500. And that's all we really need to calculate the payment. If I didn't have a negative and I put an equal instead, it would be a positive, it would be a negative number when I finish it. So this flips the sign for me. It's probably not the most proper way to do it. You put the negative inside the formula, but that is the easiest way to do it. I find, so I'm going to do that. And then we got that. And so I'm going to close up. I'm going to make skinny C or make C skinny, whichever way you want to say it, I'm making a skinny C. And then I'll put my headers, I'm going to say periods, or you might just say months, let's say, let's say periods, periods, and then payments, interest. I'm going to put a top loan reduction. Notice that I decided to put my header on two lines instead of doing something like this loan reduction, which you could do and you could home tab alignment, wrap the text, but then it kind of messes everything up to the side. So I don't like doing that unless I'm making a table out of it. And I'll just break it out into however many lines I think it needs. And then I'll make it look like a, like a, like a header with formatting. So I'm going to say this is going to be loan balance. You also might call it principal reduction and this being the principal, but then you might misspell principal all the time because there's two principles apparently and people are quite adamant about pointing that out. So I'm going to say that the, we have the bucket here. Let's make this black and white. And then I'm going to go to alignment and center these items. And then let's say that these are going to be our, our payment dates. I'm going to format this whole thing as a month by month type of thing. So I can select this and I could go to the number formatting and let's say we want to make it like a short date, short date. So I'm going to say this is on two 15. Let's say it's still pretty long for the date. Sometimes I like to get rid of the year, but we'll keep it on that. This is going to be on three 15, four 15, and it should copy down and see the next, you know, pattern here, five 15. So there's our three months. We're going to start off at 5,000. So I'm just going to say 5,000. The payment is going to be equal to this one, seven, six, four, 82. I'm going to copy that down. I don't want it to move when I go down. Therefore I'm making it absolute, selecting F4 and the keyboard, putting a dollar sign before the B and the four. You only need a mixed reference, but an absolute one will work. Meaning if I copy this down, putting my cursor on the fill handle to copy down, you get the same number it pulling from the same source data. The interest in month in the, in the first month after the first payment is going to be equal to the 5,000 times the rate of 35%, but that's the yearly rate. So I need to divide that by 12. Now anything that's outside of my, my field here where I'm working, that's in the dataset, I need to make absolute because when I copy it down, I don't want it to move down. So this one in column B, I'm going to put my cursor in there, select F4 and the keyboard, dollar sign before the B and the three. You only need a mixed reference, but that works. If I copy that one down, it doesn't look right yet, but I can see that it's picking up the cells that I want. That number's not moving down is the point. Here's the difference then. This is the payment that I'm making minus the interest portion. This is the loan reduction. So the balance is going to be 5,000 minus that loan reduction. So now we're at 3,381.01 for our new loan balance. The interest is changing dramatically because the loan balance has changed. It's being properly calculated. So then if I copy these two down, I can copy this one down. So now this is the difference and this is our balance after two payments. And if I copy it down one more time, it should be to zero. And that's the point. So we're going to imagine here that our cutoff date is 228. And so you can say, okay, well, the next payment that we make is going to be on 315. The problem is that I have 15 days before the cutoff and 15 days after the cutoff. Now this is not a very, that means that part of this interest should be applied to the cut before the cutoff and part of it, half of it about should be after the cutoff. Now note that this isn't like a significantly high number. That's why I tried to make the interest a little bit larger here. But you can imagine loan structures could be structured where they're not basically monthly payments or they could be larger monthly payments and whatnot. And so you can imagine a situation where this gets significant just like with rent and an office building, if they structured the terms so that you pay at a different time than the accrual concept is trying to say, hey, look, you need to be recording the expense when you incurred it, not when you paid it. That's the general idea. So in this case, what's it going to be? It's going to be equal to this 145.83 divided by two. That's about the amount of interest that was incurred in February, which won't actually be recorded until we make the next payment in March. So in other words, I need to pull this 72.92 into February. The dollar amount is low, therefore it might be in material in practice in this case. But the concept would remain the same and you can imagine the amount being material, significant to decision making and so on, and therefore relevant. So that's the idea. So now let's make the transaction. Okay, so now we can just enter the journal entry. So I'm going to go back to the QuickBooks. Let's go back on over, back on over. And so now what I need to do then is record the interest that has been accrued. I'm going to make a new liability account, which could be called accrued interest or interest payable. And then the other side is going to be going to interest expense. Now I can do that with a journal entry. If I hit the plus button, we can make a journal entry, but there's only two accounts affected. So I could do that journal entry instead of with like a debit and credit format. We could do this in terms of the ledger journal entry, which will still see the debits and credits, but use that format. So I'll do that tab to the left. And I'm going to go down to the chart of accounts. So I'm going to go down to my, no, the accounting, accounting and then the chart of accounts. If you're in the business view, by the way, going to the business view, the chart of accounts is under the bookkeeping on the left hand side. And then the chart of accounts. And you have to hit that to see it if you're in the sample company. Okay. So I'm going to close this up. Now the first thing we need to do is enter an interest payable account, because I don't think they have one. I'll double check down here. So we got other current assets, loan payable. So, okay. So I don't think so. So I'm going to say, let's go up top and say new button. And it's going to be a liability type of account. It's going to be an other current liability, other current liability and tax form. I'll just call it loan payable. I'm not, again, I'm not really concerned with the tax line at this point, because I'm not going to import it directly into tax software. I don't think that's efficiently done at this point in time. And then the name is going to be, it's going to be, you could call it accrued interest. I like to call it interest payable, which may not sound quite as sophisticated, but the payable, I think more clearly says, hey, this is a liability kind of account to me than saying accrued something accrued, meaning accumulated interest, you know, that hasn't been paid or whatever. So I'm going to say, let's save it. Now I could do the adjusting entry. Now the two accounts that are impacted are an expense account, which doesn't have a register. So I can't use that account if I want to use a register or a balance sheet account, which does have a register. So if I'm going to use the register, I got to find that interest payable, which is an other current liability that I just put in place here. So let's see. Where is it? There it is. There it is. Let's open the register with it, register. And then I'm just going to hit the dropdown. I'm going to make a journal entry, but do it into the register. And it's going to be as of the end of the cutoff date. All of them are going to be 022823 cutoff date. I'll keep that. The name is fine, or the number is fine. And I'm going to put in the membo adjusting entry. And I might want to put like more than that in the memo. Let's say adj to explain exactly what I'm doing. But at the very least, I want to say, Hey, look, this is an adjusting entry, especially in any time, whether I'm doing it and I'm doing the bookkeeping, or if I'm like an accountant doing the adjusting entries and trying to work with a bookkeeper, because I want to, when I'm looking at it from the bookkeepers perspective, see what someone did as an adjusting entry versus what was done from the bookkeeping side of things. I can see that a couple different ways. One, it's going to be entered with a journal entry, which is an indication that it's an adjusting entry. It's going to be entered as of the end of the period, which is an indication that it's an adjusting entry. And I'm going to put it in the memo. All right. And then I'm going to say this is 72.92 increase over here. And the other side is going to go to interest expense, interest expense. I'm going to pick that up. Boom. All right. I think that is it. So let's save it and close it over here. Let's save it and close it. And then let's see what happens going back to my balance sheet, running it, running and scrolling down. We've got the interest payable 72.92. Mui B to the end. It's a journal entry type of form. If I go into it, we go into the debits and the credit side of things. I'm going to put this adjusting entry thing on both sides for the memo description. There's, there it is in debit and credit format. And so we're going to say okay. And scrolling up top again. The other side's on the income statement. And we put it down here somewhere into interest, interest expense. This seems to only be going for January 022823. Okay. Paso with that. Let's see. I thought I wanted this on a side by side. What in the world happened? It's not how things are supposed to be. So interest expense. So if I go into interest expense, then there's the 72 on this side. So that looks good. So now in theory, we've got this correct. Now, as of, as of the cutoff date, it's a classic adjusting entry. We've got an income side to it and a balance sheet side to it. But it might actually mess up the accounting department who was was thinking they're just going to record a normal journal entry according to the amortization schedule in March. Therefore, we might want to do a reversing entry for this one because what the accounting department is doing is fine from their end. And we want to let them keep doing what they're doing without getting messed up with our transaction to make things perfect as well as we can as of the cutoff date. So we're going to end up doing a reversing entry. We'll see that next time. Also, just want to show another report. If I right click and duplicate this, we can go to the reports on the left hand side. And if I go down to the journal report, I'll just type it in here instead of going and finding it journal report. Then this is the report that we can basically show our adjusting entries. Now these are showing all journal entries here. I can limit the journal entries by one date up top going from 0 to 28, 23, 0 to 28, 23. So I'm looking at journal entries for one date. And then I want to look at journal entry forms, things that are entered with a journal entry. And I can limit it that way as well by customizing and say I want to look at the filters, transaction type, and look at just the journal entries and then run that. So now we've got we've got just the journal entries. Now note, I still have a couple of journal entries up top here that we're on 228. So it's not a perfect, it's not perfect, but it does limit me to being able to see the journal entries that are in place. And of course, if I wanted to provide this say to a client or something to show them our adjusting entries, I could export this to Excel and delete the other entries that are not part of my adjusting entries so we can be clear on exactly what we did versus what's being done in the accounting department. Okay, let's open up the the trial balance because we did do an adjustment. A change has been made. So let's go to the reports up top and type in trustee trial balance, trial balance. And then I'll change the range from 010123 022823, run it to refresh it. Let's see it on a side by side. Here you go messing up the dates again. What the hell's what's wrong with you today, man? Confusing people. You're confusing people. I can't do it anymore. You messed it all up. My career is ruined. Okay, so if your numbers tie out to these numbers looks good. If not, then try expanding the date. Sometimes it's a date range. Issue will be running another journal report at the end of the adjusting entry process to further drill down on the differences.