 QuickBooks Online 2024, adjusting entry related to unearned revenue or customer deposit, advanced payment. Get ready and some coffee because our bookkeeping is going to be sublime with QuickBooks Online 2024. First, a word from our sponsor. Yeah, actually, we're sponsoring ourselves on this one because apparently the merchandisers, they don't want to be seen with us. But that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our Accounting Rocks product line. If you're not crunching cords using Excel, you're doing it wrong. A must-have product because the fact as everyone knows of accounting being one of the highest forms of artistic expression means accountants have a requirement, the obligation, a duty to share the tools necessary to properly channel the creative muse. And the muse, she rarely speaks more clearly than through the beautiful symmetry of spreadsheets. So get the shirt because the creative muse, she could use a new pair of shoes. If you would like a commercial-free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Here we are in our Get Great Guitars 2024 QuickBooks Online sample company file. We set up in a prior presentation, opening the major financial statement reports as we do every time. The reports on the left-hand side and the favorites, right-clicking on the balance sheet to open a link in a new tab, right-clicking the profit and loss to open a link in a new tab, right-clicking the trial balance to open a link in a new tab. Let's go to that tab to the right, close up the hamburger, change the range. We're going from 010124 Tab 022924 Tab. Let's see this on a side-by-side with the months and run it, tabbing to the right, closing the hamburger. Change in the range, 010124 Tab 022924 Tab. Month by month on the side-by-side, run it to refresh it, tabbing to the right, closing the hamburger. Once again, 010124 Tab 022924 Tab, side-by-side on the months and run it to refresh it. Let's go back to the balance sheet. We're now looking at another adjusting entry, adjusting entries happening at the end of the period, month or year, typically, in our case the end of February, because that's the last date that we were working on, typically used, adjusting entries that is, to make the financial statements as close to as possible the type of method being used. In other words, usually a cruel method, but could be used for a cash-based method or could be used for a tax-based method. We're now looking at accounts receivable again, but in a different way as we saw it before. So we saw an adjusting entry for accounts receivable before related to an invoice that we might have entered, which was entered after the cutoff date, in our case after February, sometimes in March, but the work was done in February, therefore we had to do an adjusting entry to bring the invoice back into the current period. So we recorded revenue when the work was done. We're going to do this time an adjusting entry related to unearned revenue. Sometimes it would be a customer deposit situation. This one often confuses people because it's going to be different than what we typically see in a book problem for unearned revenue. So I'll try to explain why that difference comes into play, when this might take place. This is also a transaction that isn't something that would be typical for every type of industry, but would be specific to particular types of industries. So let's look at a flow chart. This is a desktop flow chart that we're using for online purposes just to look at the flow of the forms, which will in essence be the same for any accounting cycle. We're on the customer cycle or revenue cycle. Remembering that the revenue cycle might look different depending on the type of industry that we are in. At the end of the day, we typically would expect cash to be going up for goods and services that we provide to customers. So the easiest revenue cycle typically would be like if you had YouTube paying you or something, then you just might wait till it clears the bank with the help and the use of the bank feeds, record a deposit form and the revenue at that point in time. You can automate that. That would be very easy. But sometimes you might be at a cash register. If you're in a cash register situation, typically you want to record the sale at the point in time it was made, still being a cash-based system because you're doing the work at the same time you get the money. But you will usually have to then put it into a clearing account so that you can then deposit it into the checking account in the same format, same grouping as will appear on the bank statement to help match out to the bank feeds and to do the bank reconciliations. And then we have an accrual system in which case we're going to do the work first and then bill or invoice the client, increase in accounts receivable, which we'll then have to track, receive payment on and then make the deposit, noting that we can't really choose which of these methods we're going to use, right? If I'm a YouTuber or something like that, then I'm going to have this method that's the industry I'm in. If I work at a food truck or something like that, a restaurant, then I'm going to be in a cash register situation. It's just how it is for restaurants, right? And then if I'm in a law firm or a CPA firm or some service business landscaping, I typically have to do the work first so I can bill the client for the work that was actually done, invoicing, tracking the accounts receivable. Now, we noted before that you could have a situation where you enter the invoice and it's not exactly at the same point in time you did the work. In other words, if I was at a CPA firm, for example, then I'm going to have my staff, if I was a partner, the staff would be doing the work. I would just be lounging and then talking with the clients and whining and dining them and whatnot and then having the staff do the work. And then I would then I'd bill for the work that they did in the last couple of weeks or last month. That means that the invoice, although it's the closest form to the point in which the work was done, was actually entered after the work was done. And in that case, you might end up with that transaction where you have to pull the work back into the prior period to be exactly correct on an accrual based type of system. So we looked at that before. The situation we have this time is that we might have something backwards. I might receive the payment before I actually do the work. When would that happen? The classic example would be a newspaper type of situation. So if someone purchases a newspaper, which I don't know why anyone would do anymore, given the fact that the legacy media is on its last lame leg and the newspaper is nothing but a rolled up brick that you're paying for someone. I've talked about this before, but I'm just saying, rolled up brick that you're paying for someone to throw at your house. That's what you're buying with it. But some people still buy the newspaper. And that means that when you purchase a year subscription on the newspaper, you haven't actually got the newspaper at that point in time. So from an accrual standpoint, you haven't gotten what you paid for. So if you were the newspaper company selling those bricks that you're throwing up people's houses, then you have to basically record it as a liability until the point in time you earn the revenue where you actually have that kid throw it through someone's window. That's the idea. Same with a magazine item. But any subscription would also be similar. So if you were an online application, you made applications that were actually useful to people, unlike the newspapers and stuff. You actually have some information that you're putting out there that people are paying for because it's actually good. Then you might have a similar situation because you're getting paid before you actually provide the software in that case. So then all the money that you receive for every sale you would think would need to technically go into a liability until you actually earn it and then you would reduce the liability. Another situation which is similar is one in which, let's say you're in the music industry and you put on concerts or something like that. Well, any event like that, a concert is one in which you're going to collect the money before the concert. So that means that all the money you're collecting should technically go into unearned revenue until the concert happens at which point you've earned the revenue with the concert. We have a similar situation with rental property. If a rental property happens, someone's renting out an office building or an apartment or something like that, you might collect the first and last month's rent to make sure that you have a rent being covered in case you have a deadbeat in your apartment building, which happens a lot. I'm in California, so that's kind of a normal kind of thing. So then you have to collect the last month's rent in order to kind of safeguard for that or get a security deposit, which is a similar situation. That's money that you're collecting that you haven't actually earned. So you'd have to put it on the books as a liability. In our case, we're using an example similar to that in which we're selling stuff. We're selling guitars in our case. So now we're going to say, if there's a guitar that someone requests, but we have to order it or we're going to hold on to it in the shop for you and not sell it to somebody else, then we want you to give me a deposit so that we will go and follow through with the request or we will hold on to the guitar and not sell it to someone else until you get here. And so in that case, again, we're getting the money, a down payment, a deposit before we actually do the work. So there's a couple of different ways that we can account for this in QuickBooks. The way that I think is easiest on the bookkeeper is to simply record the received payment before you enter the invoice, which results in a negative accounts receivable. That negative accounts receivable isn't exactly right from a financial statement standpoint of view because it should be a positive liability of unearned revenue. But from a bookkeeping point of view, it works quite well. Now, there is also a workaround that you can use that we looked at in a prior course or section where you can use the items to have it properly record as a liability when you record the deposit, although it's a little bit more difficult to deal with internally on the bookkeeper side of things. So I actually feel like this method with a negative receivable is better because I would rather be nicer to the bookkeeper, making sure the bookkeeper who has to deal with day-to-day transactions has as easy a process as possible to do that, trying to keep the customers as happy as possible in that way as well, and then simply do an adjusting entry at the end of the period. So let me try to explain that over here in our financials. So the scenario would go something like this. If I hit the dropdown, we're going to say we're going to get paid first. So if we get paid first, instead of having an invoice and then a received payment, we're getting the received payment before we have the invoice. You might hear that and think of that as a credit balance to a customer account, right? We're crediting accounts receivable, which means a credit balance that we can apply the invoice to at a future point in time. Now normally, what would happen in a book problem is if I got paid first, then I would put it down here as a liability called unearned revenue. So we'd put it down here in unearned revenue. You might call it customer deposit or something like that because any of those scenarios that we talked about, whether it be a rental company, us getting a deposit on the guitar, then people have prepaid for the newspaper or application subscriptions upfront before we do the work. All of those situations, we debit or increase cash and the other side should go into a liability. Why? Because we owe them the money back or we owe them the service. And then what happens in the future is we're going to complete the work. Now in a book problem, what would happen is that we're going to say that once we do the work, we're going to determine how much of that revenue we have earned. If it's a year's worth of subscriptions and we did six months of the descriptions of the year, we can reduce this by half, right? And then put the other side over here to revenue as we earn it. That would be the normal book problem adjusting entry. In practice, however, we have an added problem in that this earned revenue isn't tied to. It's not linked to the internal account to track this information by customer because the customer center, if I go back on over here and I look at my sales tab, the customer center is here. The customer center in this area is linked to the accounts receivable. That's the account that's linked to the customer center that has all the special widgets related to it so we can track everything by customer. So, for QuickBooks then, it's better for us not to use this earned revenue from a bookkeeping standpoint and rather enter a negative accounts receivable for that particular customer, even though it's not technically right from a bookkeeping standpoint, it then underreporting accounts receivable and underreporting the liability, but tracks quite easily on the plus side of this method within QuickBooks. So, let me show you what that looks like. If I go to the tab to the right, we're going to right click on it and duplicate this. So, this is something that you might run into. If you're a bookkeeper, then again, you kind of want to start to know what industry you're specializing in. So, if you specialize in industries that get paid before they do the work, you're going to run into these kind of problems and then you can come up with what you think your best solution is and you might have a specialty field in those types of industries. So, I'm going to then go up and say, this is going to be, let's go down this way. Who owes you? Let's go to the Customer Balance Detail. Customer Balance Detail. And so, let's put the date as of the end of February, 0229 to 04. Run it. Okay, so if I scroll down through here, I can say, do I have like this one right here? So, now we have Eric Music has a negative accounts receivable. If you talk to someone like your credit card company or something and they say, you have a credit, we're crediting your account or something like that. We usually think of it as a good thing, right? If we have a credit balance that we're going to apply to a future purchase, we think of it as a good thing. So, if we were QuickBooks, Eric Music contacted us. We would say something like, yeah, you have a credit balance, meaning it's an accounts receivable which has a debit balance normally to it because people owe us money, which would be an asset to us. And you have a credit balance, which means we actually owe you money. So, we have a credit balance here, but we'll apply that credit balance to a future purchase would be the general idea. So, you can see how it would link out to the future purchase. But technically from a bookkeeping standpoint, from a financial reporting standpoint, we shouldn't have negative ARs, accounts receivable. It should be in a positive unearned revenue. But you could see logistically, that will cause problems because if I put this into an unearned revenue account, it's going to confuse the sub-ledgers that we want to track internally to be able to communicate with our customers. So, that's why we end up with this negative receivable. So, we have the same thing down here for Sam the guitar man and so on. So, we have these two amounts. So, that means that our, this is 250 and this is 200. So, our accounts receivable is basically understated by 450 and our liabilities are also understated by that same amount, 450. Now, also realize that if you're a small company, then you might not even need the adjusting entry. You might be able to use this method and say, well, I'm only doing my books for tax purposes and for tax purposes, you just need the profit and loss because the schedule C is based on the profit and loss. So, in that case, you might not even need to do this adjusting entry because the adjusting entry has to do with two balance sheet accounts. In that way, it's a little bit strange of an adjusting entry because it deals with the two balance sheet accounts and doesn't have an income statement account to it. So, it's not going to affect like a schedule C on the tax return generally. So, just keep that in mind as well. But if we're doing this for external reporting, then we should have this be higher by 450 and we can have the other side on the liability. Let's just take a look at it internally before we do that. We did one of these for Anderson guitars just to see how this looks internally and why this method might be useful. So, in Anderson, for example, we had this one where we had an estimate. So, someone called in and made an estimate and it looked like this. So, we had these two guitars and we made the estimate of $1,300. We used that to calculate the payment, the prepayment. So, then we got a prepayment of the $300. Now, this $300 was not originally assigned out to an invoice because we got it before we got the invoice resulting at that point in a negative $300. And then when they actually received the guitar, we then entered the invoice and connected it to the payment to close it up. So, you can see how everything kind of works beautifully internally with this method, although we have that difference, that problem financial statement reporting-wise between the step when we got the deposit and making the invoice having a negative receivable instead of a positive liability. Let's look at the same thing for one of these other ones, which was let's do Eric Music and look at that one. So, if I go into Eric Music, so this one has an outstanding unapplied. So, if I look at what happened here, we could say, we made an estimate and then based on that estimate, we then created a payment. So, here's the payment that happened. But that payment, if I edit it, the payment decreases accounts receivable and is usually linked to an invoice. We're not linking it to an invoice because we got the payment before we got an invoice. So, it's still going to be decreasing the accounts receivable, but because there's nothing in accounts receivable for this customer, it's going to result in a negative or credit balance for this particular customer. You can see that works great internally because if someone comes in, Eric Music comes in, I can see exactly what is happening here. I'm going to say, oh yeah, you have a $200 unapplied credit balance that we could apply to a future purchase, which I'm assuming would be based on this estimate that was created. So, I can convert this estimate into an invoice and apply out that credit balance to it and I can see exactly what is happening. So, that's why this method works good kind of internally. So, that's going to be the idea. Now, notice if you were in the type of industry like a newspaper, then it might work out a little bit differently in that all of your payments would be prepayments. You could still use this method of having a negative accounts receivable if you wanted to. You could use the other method as well, but then you might create periodic invoices based on that that will actually automatically move the money from the negative receivable to the revenue, right? Because then you say, okay, I gave out a year's subscription each month, I'm going to make an invoice which will basically reduce the payment, the accounts receivable and record the revenue. So, it's a little bit different of a method, but you might not need like an adjusting entry at the end of the year. You might be able to do it kind of internally by creating invoices periodically and monthly to deal with those prepayments you're getting in a subscription model. I think we have another course or section on that if you want to get into that in more detail. For now, we're going to say, okay, if I'm trying to make my financial statements correct as of the cutoff date, then I can see these two amounts are understating the accounts receivable and I'll just do a journal entry for it. So, that's not a problem. But we have that same issue we saw before in that if I make a journal entry to accounts receivable, it's going to force me to have a customer. And if I have a customer, that's going to mess up the internal subledgers in here in the detail. And I don't want to mess up the internal subledgers. So, what are the methods we could use? Number one, we could make another account just specifically for our adjusting entry. The problem with that, however, is I can't really make a sub account of accounts receivable because it will still have the subledgers, which is what I'm trying to avoid having. So, I would have to make accounts receivable adjusting account as an other current asset account, which that's not too bad, but it's still kind of ugly because it's not like right next to each other. That's one method. Second method, I could create a customer that is just going to be like customer ZZZZ, for example, so that I can still assign a customer, but it won't be an actual customer so it won't show up in any actual customer detail, therefore hopefully minimizing the impact to the bookkeeper because we love the bookkeeper and we don't want to mess their stuff up. Method number three, we could use the actual customer to record the adjusting and reversing entry, which we should be able to tie out against each other, so it shouldn't be like there's going to be hanging invoices that aren't applied or hanging journal entries. However, it's still a little ugly because then there's going to be these journal entries that don't look right really in the audit trail in here because they're adjusting entries, although the subledger will be technically more correct if you needed that for external reporting. So I'm going to choose method number two. We're going to create our own customer, customer ZZZZ to do our journal entry so it doesn't mess up the internal customer information. Okay, so you would think that to do this you could go into the transactions and then say, well, it's a journal entry so I could go into the AR register and do it with a register. The problem, however, is that you can't really add a transaction because this register requires you to have a customer and you can't really do that with the register entry because it's the short entry method. So we basically have to use a journal entry in essence. So I'm going to go into a journal entry here and we're going to say it's as of the cutoff date. It's going to be 022924. Everything's as of the cutoff date for the adjusting entries. We're going to be debiting accounts receivable, accounts receivable. I'm going to do it for 450 which is the amount of those two customers that had negative balances for them. I'm going to call it an ADJ entry so I can see it. I'm not going to put a customer in to start with to let you see how QuickBooks won't let me post it without a customer. And the other side is going to go into unearned revenue which we have set up before unearned revenue. It's an other current liability account so if you need to set one up, other current liability account, some people might call it customer deposit. That's what you might call it if you're a rental property, for example, and you got deposits from the customer. It's going to be a liability. Sounds funny because it's a deposit. You're like, that's an asset, isn't it? No, it's a deposit from the customer, though. So it's something that you owe back to them. But I'm going to call it unearned revenue and that's going to be the credit. So that's going to be the transaction. Increase in accounts receivable, increase in the liability. Now, if I save this, it's not going to let me record it. So it says something's not quite right. What are you talking about? Something's not quite right. Oh, hold on. That's the wrong one. Oh, man. Okay, so when you use accounts receivable, you must choose a customer in the name field. So I'm going to say, I don't want to pick the actual customer because it's going to mess up the bookkeeping, having that in the customer center. So I'm going to say put it in ZZZ. I made ZZZ customer in a prior presentation. I chose ZZZ as the name so that it would show on the bottom last thing in the customer center, hopefully out of the way, not bothering the bookkeeper. Let's see if it lets us record it this time. I think it's going to work. Let's see if we can do it. Boom, records it. Woo-hoo. All right. So then if I go back to the balance sheet here, let's run the balance sheet and we can see that in the accounts receivable, going into the AR, we have then our adjusting entries. So we made two of them. There's the 450. If I go into the 450, we get to our journal entry. And so I'm going to close that out. And then the other side, boom, not on the income statement. So it's not like a classic adjusting entry. This is balance sheet to balance sheet, but the same concepts apply in that we're trying to not mess up the bookkeeper and then make a periodic adjustment for the thing that we needed to do so that we didn't mess up the normal accounting process. And if we are the bookkeeper, again, we might be the bookkeeper. I'm trying not to mess myself up. And as I do the normal bookkeeping process and noting that I'll make it easier on myself by doing an adjusting entry at the end. It's not like we're the superior adjusting entry people that are basically telling the bookkeeper the simple way to do it because they're stupid or something. No. I mean, even if we're doing the bookkeeping, we want to make the bookkeeping as easy, as automated, as possible so they can do more bookkeeping for more people streamlining the process. And then we do that by doing these adjusting entries to make the cycles smooth. So that's the point. Okay, so I think I made the point there. So anyway, that's the adjusting entry. If we go to the subledger now and run that, so now we have the subledger. Notice I still on the subledger, the downside of this method is it's not going to show like the change here in here, right? The subledger still has a negative 200. The change is happening down here in the ZZZ account. So now we have the ZZZ account that's counter-actoring the other two amounts. So if you needed to present the subledger in your external reporting for whatever reason, you might have to export this to Excel and basically modify it yourself for these negative amounts, removing this, removing this, and removing this, right? They're going to net out against each other. But I think that's nicer to see. Even if you entered it in the proper customer, it would still be ugly because it would show an invoice, which would be, I mean, a journal entry. You see it shows a journal entry. That's not what should be there. It should be an invoice, right? So there's no real perfect method. Now also note that my balance should be tied in exactly because QuickBooks is forcing us to add a customer which would make the subledger tie in. But you'll note here, this is at 22626.50 minus what's on the balance sheet, which is at, as of 229, it's at 23151.5. So there's actually a difference of 525, not resulting from the transaction we did this time, but the one we did last time. So if I go back on over to the first tab here, you can see in this ZZZ customer last time, we did a journal entry on 229 to bring in the invoice. There's the 525. And then we reversed it here on 3.1 after the cutoff date. So this 525 should still be showing up before the cutoff date and then we reversed it after the cutoff date and then we used this payment form to connect the two outs. They're no longer outstanding. So if this was an invoice and I ran it here as of 229, it would show up. But notice because it's a journal entry, I believe it's because of its journal entry, QuickBooks is having a problem linking these two things together and getting the date right, right? So it's still having a problem with that. So just note that it is possible, it looks like, to have the subledger be off, even with QuickBooks forcing you to add a customer because of this issue with the journal entries. But as of March, we'll be back in balance because the reversing entry will be good. So as of 03.3124, then we'll be at then the 03.151.50 and if I go to the balance sheet and I bring this up to 03.3124, so we can see the next month we're at the 03.151.50. Alright, so I just wanted to point that out. If we go back on over, let's bring it back to 02.2924 and run it. So that's what we have here. And then if I go into my internal documents back this way, you can see that it is in customer AziziZ. So these are the two, these ones that are closed in green we did before. Now we have this journal entry, which is open. So note that in this customer center, all of this stuff is ugly. This is stuff I don't really want to bother the bookkeeper, which might be myself with actual customer information. I don't want to mingle this with actual customer information. That's the idea of putting it in the AziziZ customer. Because if I was up here in say Eric Music and I went into their customer center and if I had all this stuff in there with journal entries, then it would look ugly because if Eric came in and was like wanted to complete the purchase that took place and I had another journal entry in there that basically is a journal entry that nets out that 200, it would no longer look like they had an outstanding balance. Next time what we'll do is we'll do the reversing entry, which will do a similar thing we saw in AziziZ for the last AR transaction, meaning the two entries will net each other out one before the cutoff, two 29, one after the cutoff, three one, March 1, and then we'll combine them together so they won't be like outstanding items. So if you put them internally in the actual customer's information, it won't be too bad because it should net out against each other, but still it's a little messy when you're trying to communicate with the customer to have these journal entries like in that center. So I would think that would be annoying as a bookkeeper or for myself. If I was the bookkeeper, that's why I'm putting it into the AziziZ thing. All right. So that's where we stand at this point in time. Here's where we are on the balance sheet. Here's where we are on the income statement. I know I'm scrolling through quickly, but I'll take a look at the trial balance, which I think is the best one to be taken a look at. But we'll go to the trial balance. This is where we stand as of this point in time. And if your numbers have these numbers, great. Let's see if it's a date range issue. And then next time, we will do the reversing entry for this unearned revenue. It is one that needs a reversing entry.