 Zero accounting software 2023, adjusting entry loan payable, breaking out the short-term and long-term portions. Get ready to become an accounting hero with Zero 2023. First, a word from our sponsor. Well, actually these are just items that we picked from the YouTube shopping affiliate program, but that's actually good for you. Because these aren't things that were just given to us from some large corporation which we don't even use in exchange for us selling them to you. These are things that we actually researched, purchased and used ourselves. Acer 27 inch monitor. I've been using an Acer monitor as my primary monitor for a few years now. This is the first Acer monitor that I have used after having used a series of different brands of monitors in the past. The Acer monitor has been performing well and I'm trusting the Acer brand more and more as I use the monitor. I have a 27 inch monitor, which I think is ideal for what I do, which is of course the screen recording and the editing. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com where we have many different courses. You can purchase one at a time or have a subscription model, giving you access to all the courses. Courses which are well organized have other resources like Excel files and PDF files to download and no commercials. Here we are in our Custom Zero homepage going into the company file we set up in a prior presentation. Get great guitars. Duplicating some tabs to put reports in like we do every time. Right-click in the tab up top so we can duplicate it. Right-click in the tab up top again so we can duplicate it again. Let's go back to the tab to the middle. Accounting drop-down. We want to pick up the balance sheet. This is a comparative balance sheet, but if you don't have that, you can open the normal one. Tapping to the right. Accounting drop-down. Same thing on the income statement. This being a comparative income statement, but if you don't have it, you can open the normal one. Back to the tab to the left. We're doing the adjusting entries. Remembering that those are entries at the end of the period, either month or year. In our case, the end of the month of February, that being the cutoff date to more properly make our financial statements correct according to whatever accounting method being used. In our case, an accrual method for either external reporting, for example, or for tax preparation, possibly. So we're going to be down here on the loans now, and we're looking at breaking out the short-term and long-term portions of the loans. Now, this one kind of deviates a little bit from a classical adjusting entry because a classical adjusting entry will typically have at least one balance sheet account and one income statement account because they are timing differences. Here, however, we're going to be breaking out between two balance sheet accounts to report the short-term and long-term portion of the loan payable. So now that we have the concept of this adjusting entry happening at the end of the year, let's think through a few of the problems that could happen with the loan payable and how you might utilize this adjusting entry process to fix them, and there's different options that you could use. So for example, the first problem that comes to mind oftentimes from the bookkeeping perspective is when we are entering the data and paying off the loans, we have to break out the interest and principal portion of the loan according to like an amortization table. That causes a problem because we can't fully automate the accounting system with the bank feeds because although we can watch the transaction clear the bank when we pay the loan off, the breakout between the interest and principal will differ and therefore we can't automate it. Now one way you can kind of get around that if you're thinking about adjusting entries at the end of the period is you can say, hey, look, I want to automate my payments. So what I'm going to do is I'm just going to make a payment each time for the full amount and just have one other account affected, writing the whole thing off to the reduction of the loan payable, not breaking out the interest. That will be incorrect, but it could be one of those sacrifices that we make during the timeframe to make the data input easy. And then at the end of the year, possibly when you're doing taxes or something like that, you take the amortization schedule out or you have your accountant do the adjusting entries and say, hey, look, here's my loan account. I just recorded all the payments to the loan account. What I want you to do is break out the proper interest and principal according to this amortization schedule and the loan documents. And so in that way, that's one way that you can work in an adjusting entry process and work in multiple people in the system, making your bookkeeping possibly faster and then counting on an adjusting entry to shore up the difference at the end of the year. Okay, another issue that comes up with the loans is that if you're in some industries like construction, for example, you might have a lot of loans on the books because you might be financing equipment or something that you're purchasing in order to generate revenue with the equipment. That means for reporting purposes, however, you really only need one loan payable for short term and one loan payable for long term. So you might then say, I'm just going to have one loan payable and then have all of my breakout of the loan payables on amortization schedules. And if I add up all the amortization schedules, they will add up to the loan payable account on the balance sheet. But that's probably not the easiest way to do it. The easiest way to do it is probably to have a separate loan account for each loan listing out the lender possibly and then possibly the last four digits of the loan number because those are the distinct wishing numbers oftentimes on the loan so that you can see which loan you are in and you can tie the loan balance directly out to the amortization schedule kind of as you go. Or when you're doing periodic adjustments, it's a lot easier to tie each loan balance out to one line item than trying to tie out all the loan balances to one line item on the balance sheet. Now for reporting purposes, zero has that great flexibility of being able to make these multiple accounts, for example, and then group them together not with subaccounts like you might see in other software like QuickBooks but rather with this grouping mechanism which is actually more flexible. And that allows us to put them all these loan accounts under the heading of loan payable. And if we want external reporting, I can collapse just this one item. I can collapse that one item and generate a report that just has the loan payable on it. So that's another problem that comes up with the loan payables. Now the next problem, and this is the one we are addressing here primarily, is this issue of short-term and long-term loan. And this happens for external reporting purposes. You generally need to break it out or internal for your own use but you need to break it out between short-term and long-term especially if you're required to by some external force such as the bank or something if you're given it to the bank or external financial statements or for taxes for example. Now note that if you're a small business and you're just doing this for taxes and you just have like a sole proprietor then you might not need to break out the loans between short-term and long-term because the primary statement for a sole proprietor is simply the income statement. You don't even have the balance sheet although you need the balance sheet in order to have the double-entry accounting system to work properly. But you may not need to break out for in short-term and long-term because it's solely a balance sheet item. But if you have more complex tax returns and you're reporting corporation returns as corporations possibly partnerships then you might have to report the balance sheet which means you might have to break out between short-term and long-term for tax purposes. And so most loans have this installment kind of system. So you're paying off the loans possibly monthly similar to a mortgage. That means that the short-term portion is just an arbitrary line which is 12 months out. So whatever is due within 12 months is short-term. Whatever is due beyond that is long-term. So we have to break out the loan between short-term and long-term. Now this causes another issue because now if I break out between short-term and long-term I have two accounts that represent possibly one loan, right? And I don't want to have two accounts representing one loan for normal bookkeeping purposes because if I tried to break out the short-term and long-term every time I make a transaction I would have to make an adjusting entry every time I make a payment. So this is why we're going to break out short-term and long-term only for a year-end or period-end month-in adjusting entry and then we will reverse it so that we have one account per loan for the internal bookkeeping to be as easy as possible. Alright, so we're going to be focused on this one here. And notice if I look at this because this one's all short-term. I don't need to break out between short-term and long-term because it's all short-term. This one's long-term and short-term because it goes beyond a year. So 69, 87, 813, the amortization table is right here. So there's the amortization table. I'm going to add a couple columns. So I'm going to put my cursor on J and go over to L, right-click and insert a couple columns so I can see what's happening. And then let's get rid of the formatting. I'll get rid of this. Okay, so we see that includes the short-term and long-term portion. Now this is where it gets a little bit confusing for a lot of people. Let's make this one a little bit skinny. You might say, well, it's easy to know what the short-term portion is. It's going to just simply be, I'm going to have to make 12 payments of that times 12, which is 16, 304. And if that's the whole amount, then you would think that the long-term portion would be this minus this. But that's not exactly correct because these payments include interest. So you cannot include the interest. And you might say, well, why can't I include the interest? Because I've committed to pay this full amount for five years. I know I'm going to pay it. That's what my liability is. But that would be similar to saying if you rented the office space, for example, and you've got a year commitment to it, that you're going to record the liability even though because you signed the lease, even though you haven't actually incurred living or using the office space. And that's the same thing with the interest. The interest is like the portion of the loan that's the rent. You haven't incurred it yet because you haven't used the purchasing power of the money to incur the interest. So we can't include the interest portion of the amount that's going to be short-term. That's why you need the amortization table because the loan amount, the loan reduction amount, is what we need, the amount that's actually going to be reducing the loan. So if I count that out, if I'm on like two, I'm just going to go 12 months out. So one, two, three, four, five, six, seven, eight, nine, ten, eleven, twelve. So here's where we are at the end of 12 months. I'm going to make that yellow, not the letters, yellow, but the, you know what I mean. So then if I sum this up, the short-term portion is the sum of the payments that we're going to make. Just the, but not the payments, the reduction to the loan balance, which is only 13108.54. And the ending balance then is going to be equal to this minus this. And you can tell that makes sense because this amount should tie out to where we will be down here. After a year's worth of payments, in other words, we'll have short-term and long-term full amount of the loan that's due 56, 7, 69, 59. So it would make sense, so this makes sense that this is the short-term and this is the long-term because they add up to this full amount. And if you subtract them out, or if you subtract where we are now minus the short-term, you get to the long-term, which is on the amortization table after 12 months. So that's the breakout that we're going to use. So all we have to do then is a journal entry. This has the full amount in it. So we're going to lower that amount or this one by the 13108 to bring it down to this. And the other side is going to be, well, this should be actually the short-term. Let me do that the other way. We're going to lower this down by the 56, 7, 69, 59 to get it down to the 13108, 54, leaving us with the new account, which will be 56, 7, 69, 59 for the long-term portion because everything is in short-term. In other words, everything's in the short-term here, so we're going to take the long-term out with a debit because this is a liability account and then put it into the long-term portion, leaving us the short-term portion here. All right, hopefully that made sense. I don't think I said that very precisely, but I think the point has been gotten across, so I will not talk anymore. This is going to be the journal report. Let's go into the journal report to do a journal entry and we're going to say that we want to add a new journal. We're going to do it as of the cutoff date, so this is going to be an adjusting entry as all of them are on March or February 28, Feb 28. And this would be a reversible one. We would want to reverse it because I'm only doing this for reporting purposes, but I'll show you the reversing entry. We won't do it automatically, so we can see why we would want to do a reversing entry in the future presentation, but that's a cool tool that Zero has. Okay, so then we're going to say the account. We're going to take it down this account, which is the loan payable for Chase. That's the big one. We're going to debit it by the 5676959. Can I remember that in one thing? Debit 56769. Oh man, 56769.59. I kind of cheated. I had a cheat sheet here. Okay, and then the other side, I didn't really memorize it. I don't want to lie. But the other side, we're going to put it into a loan payable. Let's hit the dropdown. It's going to be a long-term loan payable. So if I scroll down and so then we want to go into long-term liability. So I'm going to make a new account and I'm going to say 2700, dropping it down. And we want scrolling down. We want liability. And so it's not going to be current liability. We want the long-term liability. So that's what we want. And this will be, now I could put one account for the long-term liability, but I think it's going to be easier for us to make another, a long-term liability account per loan. So we might take the same account up here that we had, which was chase loan 2415. So chase loan 2415 and say long-term portion. All right. And then we're going to say, all right, I think that's good. So there it is. So there's our adjusting entry. So this, when we record it, should bring the short-term down to this and the long-term should be on the books for that. All right. Let's save it and check it. See if I did that properly. We're going to up to the dated on this side and scrolling down. We've got the loans in the liability area. So now the loans down to 1310854, 1310854. And then the long-term portion is right here where we have the 5676959. So that looks perfect. Now, if I had multiple loans with a long-term portion to them, I can create a group. So if I had two loans in here that had a long-term portion, I would go into my layout down here and select those two loans. So I would select them like this, holding control and select two loans and then group them together. But I don't need to do that because I only have one loan. So I'm going to discard the changes. Just want to know that that flexibility is really neat with zero. But now what I don't want to have going forward are these two accounts for this one loan going forward. You can see the problem because if I start recording other payments going forward, it would be a mess for me to break out the short-term and long-term portion per payment. So that's why the reversing entry makes sense from a bookkeeping standpoint. It says, hey, I'm going to reverse this right after so I can get it back to one account so that when we do the normal journal entries, we could tie the loan balance into the amortization table per journal entry. So again, notice that there's no income statement account that was with this adjusting entry. So it's kind of an adjusting entry in theory that I mean, in the theory that it's an adjustment at the end of the period, but not really a classical adjusting entry because it doesn't have a timing difference. It only has a difference in reporting between short-term and long-term on the balance sheet. All right, let's open up our reports and take a look at our trustee trial balance as of the current time. Type in in trial balance to open the trial balance and we'll select the range of the dates up top, customization 2023, the end of it, and update. So this is where we stand at this point in time. If you were tied in last time, but you're off this time, the only things we changed here were, of course, the loan payable. Now at the 13108.54 on the short term and on the long term, you've got the 56.769.59. Next time, we'll reverse that.