 In this presentation, we will enter an adjusting entry or look at the problem related to an adjusting entry for accounts receivable or revenue. That problem being that we have an invoice, an invoice that has been entered after the cutoff date, after the end of the month for which the work was done before the cutoff date, before the end of the month. This is a typical kind of thing that can happen in let's say like a job costing type of system where we have to basically count the hours and then populate the invoice based on those number of hours. It may well be the case then that the work was done before we issue the invoice and therefore on an accrual basis we would really need to pull that income back in to the current period. Let's get started with Sage 50 cloud accounting. Here we are in our Get Great Guitars file. We're going to start off by opening up our financial statements so we're going to go to the reports drop down. We're going to be opening up the financial statement reports. Let's start off with that balance sheet report opening up that balance sheet reports. We're going to be having the date for the second period that's going to be February so we're going to be keeping it there February and this is going to be our balance sheet. Now what we're going to have in this kind of problem this kind of adjusting entry type of problem is a situation where we have an invoice that was entered but it was entered after the cutoff date and this might be easier to see on the income statement side so let's open up the income statement side of things as well so I'm going to go back to the reports going into the income statement and we'll open up for February as well I'm going to remove the zero balances so we will remove the zero balances and there we have it. So when we think about the income statement note that usually the income on an accrual basis is going to be generated in an accounting system by some type of form some type of document that typically being an invoice or a sales receipt but in the case of an invoice that would be a sale where we didn't collect revenue yet so that would be the earliest point in time that you would typically have something that's going to be recorded as income is when an invoice is created right and that's before even cash was was put in place and on an accrual basis method you would think that the invoice would be pretty close to the time the work was actually done but notice that in practice it may well be the case that the invoice was actually entered in some point after the work was done for example if we entered the invoice as a February or if we did the work as of February 29th or for the week ended we may not gather that information and then create the invoice for it until sometime after February so just note that the form then of the invoice is not in that case the most accurate accrual basis type thing to use it's just the only thing that we have in the system to use so I mean what else are you going to do we need it we need something to record it in the system the invoice is the closest thing if we hadn't entered the invoice until after the cutoff date or if we entered the invoice after the work was done then we still have a timing difference in terms of when the work should have been entered into the system so that's going to be our our problem here we're going to want to say that the invoice was entered after the cutoff date so let's say that we had to gather work or something like that and the invoice was entered after February 29th but the work was done before February 29th and therefore we need to bring that income on an accrual basis back into the month in which it was actually done so that's going to be the problem I think it's most easily seen with something like a billable thing like a law firm or a bookkeeping firm where you have to basically track the hours of people and have billable hours and that would could be easy to see why the invoice wasn't created till after the cutoff however we want to do this with inventory just to make things a little bit more complicated so when is the work done with and why because it has inventory and cost a good sold and sales tax to deal with therefore the adjusting entry will be more difficult but for inventory when is the work done typically when you ship the goods when the goods have been shipped out that's typically when the work is going to be done now we're gonna imagine a situation where for whatever reason the goods were shipped out before February but the billing process didn't happen the invoice didn't go out until after February so the billing process for some reason happens after that the amount the items were shipped well in that case you have the same kind of situation you need to pull the income back into the time period in which the work was done and that's going to be before February so to consider this more fully we're gonna actually enter the invoice I'm gonna enter an invoice as of February and we're imagining that this is going to be the invoice voice is gonna be in March right that we're gonna have to pull back into February with an adjusting journal entry and then in the next presentation it will actually do that adjusting journal entry so now all we're gonna do is make it make an invoice over here I'm gonna go back on over close this out I don't know why that's there I'm gonna go back on the first tab here we're gonna go into the customers and sales and we're just gonna make an invoice I'm gonna say all right this is gonna be an invoice new invoice and I'm gonna make this for our first customer let's pick that customer up top let's just say Anderson is gonna be the person for which the invoice is being made and we're gonna say the invoice is dated in March so let's say it let's say it went into place in like March 6th even though the work was done before February so we didn't get around to invoicing until after the work was done and and so it should have the revenue should be recorded in February according to an accrual basis although the invoice wasn't entered until March okay so now we're gonna say there's one ELP ELP Epiphone Les Paul and we will be applying the sales tax to it so we'll say that has the sales tax on it now this is just a typical invoice what's gonna happen with this invoice it's gonna be increasing the accounts receivable by 547 50 it's going to be increasing revenue by 500 it's gonna be increasing these taxes payable by 47 50 it will also be decreasing the inventory by an amount that's not on here but we know what it is because we've seen the ELP quite often that's gonna be 400 and then the other is gonna go to cost a good sold the only thing that's new here is this is gonna be done after the cutoff date and we're gonna need to pull it in before the cutoff date with an adjusting entry so let's go ahead and say save and then just check out what has happened I'm gonna close this back out and then let's go back to our income statement so let's go into our income statement here here's the that's the balance sheet that's that's the balance sheet I want the incomes there's the income statement so then we're gonna go to the cog up top and I'm gonna I'm gonna change the date to the date range we just entered that as of which is gonna be in March so let's bring this on out to March like so and so there we have our our typical invoice on the revenue side right we've got the the income of the 500 so there's the 500 for the income and then the cost to get sold is gonna be this this 400 the difference between the two is is the net effect on the income statement the other side on the balance sheet of course so if we go back on over to the balance sheet changing the dates for the balance sheet to bring it out to March once again we're gonna say I need the date range bringing that out into March so I'm gonna go March and okay so now we have the accounts receivables should be going up accounts receivable going up now by the 547 50 and then we also know the inventory is gonna be going down inventory is going down by the 400 this is all from the effect of that one invoice and then the sales tax payable sales tax payable also affected by the 47 50 okay so all of that happened after the cutoff date our objective is to say now that that needs to be pulled back into the prior time period in other words it's easiest to see in the timing statement the revenue statement back to the the income statement this $500 revenue recognized in March needs to be recognized I mean in 8 yeah in March here needs to be pulled back and recognized in February so we need to pull that back into February with an adjusting journal entry now you might say we're gonna do that with just a journal entry you might say hey well what if we do that with a journal entry then by the time we get back out here to March 31st it'll be in there two two times won't it yeah it will that's a problem right so how we're gonna how we're gonna do this we we then will enter in a reversing entry in order to reverse it another question you might have is you might say well why if why don't we just change the date on this thing to to be you know before in March and it's possible to do that you could possibly do that in the system but you don't typically want to do that kind of thing with your accounting process you typically want to enter the invoice as you typically would enter the invoice and then have the audit trail making any kind of adjustment that would be necessary for it so generally you wouldn't want to I mean if you're doing an audit type of thing you you don't really want to delete the invoice or change the dates typically I mean again in some cases you can do that but that's not typically what you want to do and it may have maybe the case that it's already been paid or the invoice already been went out you want to check the terms of the invoice and make sure that you get a receipt payment on it and all that in the proper format so we're not gonna just change the date on the invoice what we're gonna do is do an adjusting entry to bring it back into the current time period and then we'll have this problem of it being in there basically twice and therefore we will do a reversing entry making our books correct on an accrual basis as of the cutoff date and then reversing it so that we're back to where we need to be which is hopefully the way that the normal accounting process works best from a logistical standpoint so next time we'll do the adjusting journal entry and then after that at some point we'll do the reversing entry for it that's it for now let's get out of here