 Zero Accounting Software 2023 Adjusting Entries and Reversing Entries Introduction 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 we're 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 Ugg Slippers! 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Going into the company file We set up in a prior presentation Get great guitars We're going to duplicate some tabs To put reports in the way we do every time Right-click in the tab up top so we can duplicate it We're going to right-click on that duplicated tab So we can double duplicate duplicating it again Back to the tab To the middle accounting dropdown We want to open the balance sheet This one being slightly modified But if you don't have a modified one Open the standard balance sheet Tab into the right accounting dropdown I'm going to this time open up The normal standard income statement And show how we can create a comparative income statement From it So what we have done thus far In the practice problem is we have Created a new company file We've done two months of data input Into our company file We've done the bank reconciliations For those two months And now we want to think about period and Adjusting entries Adjusting entries typically happening At the end of the period of course Which could be the end of the month Or it might be the end of the year The number of adjusting entries And the need for adjusting entries Will depend on the accounting system That you have set up On the needs of the financial statements And basically on the needs Of the particular industry you're in And possibly how large the industry is So for example You might try to set up an accounting system In which you can try to be more In a cash-based system So that you can automate your accounting system As much as you can And we've talked about some instances Where you might deviate from an accrual concept That you would need to be in alignment with In order to stay in a cash-based system Thinking that at the end of the year Or the end of the month You can just correct it with an adjusting entry process So we'll talk a little bit about those scenarios On an account by an account basis When we start to look at the different accounts That might need adjusting entries If you're in the United States Then you're going to have an income tax obligation So you might have adjusting entries At least at the end of the year In order to comply Make your financial statements correct That is for income tax reporting So you might come up with a system Where you try to automate your accounting To make it as easy as possible When you do the bookkeeping And possibly at the end of the year Look forward to help from a tax professional To do those adjusting entries As of the period end To make sure the financial statements are correct In that case on a tax basis Which might be cash or accrual basis Possibly or some kind of combination between two In order to get your taxes properly filed Now for internal purposes Adjusting entries can be of course helpful For internal reporting needs as well And as companies get larger and more sophisticated You're going to want to do possibly adjusting entries At the end of the month Also if you're doing external reporting To like a bank or something like that Or investors Then you would typically need to do Periodic adjusting entries At the point in time That you're going to be doing the reports Month end, quarter end, and or year end So with our practice problem We've done two months of data input Therefore we're going to do adjusting entries As of the end of the two month time period We're not going to do it for each month We're just going to do adjusting entries As of the end of the second month Which is February 28 So let's go ahead and review Or think about how to create a comparative income statement So that we can see the two months together And possibly the total of those two months On an income statement format So the way we can do that is I'm going to put the first month Now you've got to think Do you want to have the first month first Or the most current month first So we have January and February So we could put January first and then February And then a total Or we might put the February first And then January and then the total Oftentimes if you're going to have a total column Instead of a differential column We'll start from the oldest month to the newest month And if you do a differential column Subtracting the two Then you might start with the most recent month So I'm going to say Let's start with January first I'm going to say this is going to be January And we're going to go to January 31 And update it And then we're going to go to the Edit layout down below And I'm going to say that We want to add a column to this thing Add a column And we're going to say this is going to be A date column Add a date column Clicking on the column up top That's going to be for February So now we've got January and February And then I'm going to add another column Which is going to sum up those two months So I'm going to add another column And this is going to be a formula column And the formula column If I click on the formula tab It's going to say and January Plus the February numbers And this is going to be a total So that'll be our total And this is going to be a comparative I'll call it income statement Comparative Or something like that And then I'm going to save that And update the layout Now I'm going to put this in my favorites So this is the one that we're always going to be Basically opening up When I go to my dropdowns So what I'm going to do is I'm going to say Save as custom I'm going to name it comparative Income statement Or income statement comparative Make custom report the default I could do that But I don't really like doing that Because I'd rather just put it in my favorites area So I'm going to say save it this way Not making it the default And I want to keep the default always there In case I want to start from the default To do another kind of custom So then I'm going to go to the first tab Just to see where it's at Let's go to the accounting dropdown And reports And then in my custom reports Now I have this comparative Income statement That's the one I clicked on up there I have all this other stuff I want, I just called it See comp income statement What did it go? Here it is Income statements comp I'm going to pick that one up And then I'm going to get rid of this one So now I can see it in the dropdown So if I hit the dropdown For the accounting I've got my Comparative income statement here And I think if I refresh it I'll get the comp income statement Just this one is the one I want The comp income statement Not this one And then I hit dropdown And now we have The income statement comp Okay Alright, let's go to the balance sheet And we can do a similar thing on the balance sheet Let's start with the month of January I'm going to hit the dropdown Customize the date field We're on January And we just have a point in time This time So I'm just going to say January 31st Update it And then I'm going to go to the Edit the page layout And I'm going to add another column Adding a column And it's just going to be a date column And I'm going to say that this is The month of February 28th Now note I don't need another column Summing the two up I could take a differential column Subtracting the two Because this is as of appointment In time As opposed to the income statement Which is accumulating upward So I'm going to call this balance sheet comparative And then I'll copy that So I can save it So update here And then I'm going to Save this one As well So now we've got our two Points in time We're focused on Feb 28th though And then I'm going to save The customization And I'm just going to call it A balance sheet comparative comp Save it I'm going to put that in my favorites Go to the first tab We're going to say that we should have a balance sheet Comp Let's refresh the screen over here Because I went back over here There it is Boom Alright And then I'm going to get rid of this balance sheet here Okay So now whenever we go into here again I can hit the dropdown And we've got our comparative balance sheet And our income statement comparative here Okay So Now we want to think about the adjusting Entry process Now when you're thinking about the adjusting entry process You typically often it's useful To think of the adjusting entries As being something done separate From the accounting department It's not always the case But as the bookkeeper You want to kind of put a different hat on Often times it will be a different person Doing the adjusting entries And that will help us to think about How we might want to optimize Our particular accounting system So that we can make it as easy and efficient As possible So for example if I look at the flow chart Over here this is a QuickBooks desktop Screenshot of a flow chart But we're just looking at the flow Of the document of the forms here By cycle So what you're normally thinking about From the accounting side of things Is to think about how we can basically Make the flow happen as easy as possible Do the data input of the forms Bills, invoices, receive payments The payroll forms and so forth As efficiently as possible And those forms of course Create the financial statements The balance sheet and the income statement Now the way we deal with these forms Will be dependent typically On the kind of industry that we are in So you might think that I would like to just choose Between a cashed based system Or an accrual based system But that's not usually what happens in practice We are in an industry that demands You know a cash or accrual basis Depending on the type of Cycle we're in So if we're in like the customer cycle Or revenue cycle We might be in an industry where it's quite easy For us to be in a cashed based system And be dependent on the bank feeds Such as if we're a YouTube creator Or something we just get paid by YouTube We can just record revenue as we get paid But sometimes it's going to get more complex For example, if we have a cash register situation Then we have that situation Where it's still a cashed based system But we can't just rely on the bank feeds To record it typically because We need the internal controls Of recording the sale, comparing it To the cash that we received Or the payments we received And then making the deposit And being able to reconcile the deposits To the bank statement And then of course if we are in an industry Where we have to invoice somebody Then that means that we have now An accrual component added to the system Because now we're invoicing Before we have received the payment So when we think about the adjusting Entries it'll kind of be dependent In part on how complex our system is And if we have a more accrual based system Or a need to report on more of an accrual based system Meaning we're invoicing people We're doing more of a accrual thing And or we're dealing with inventory Then we're usually going to have More items where we might need Basically adjusting entries for it Now you also want to think about Who is the end user of The financial statements you're creating If you're creating them just for taxes As a small business like a sole proprietor Then at the end of the day You're trying to get your financial statements Situated for internal use of course But also to meet your tax obligations So what you want to think about Your accounting system is basically How can I automate my accounting system To the point that I can Using bank feeds and whatnot And then possibly get the help of a good Affirm or accountant That can do adjusting entries That are necessary at the end of the year In order to make the financial statements Correct on a tax basis So I can complete my tax obligation needs Again the other reasons You might need the financial statements Are for external reporting purposes And in that case The way you format your reports Is going to be dependent upon Whoever you're giving them to When the regulations related to that Usually that's going to be an accrual Kind of concept system So that means you're going to have to tailor Your accounting system to make Possibly period and adjusting entries To make sure you're on An accrual type of system In that format Alright so let's go back on over here Let's just take a look Oftentimes it's useful to just go through the balance sheet accounts And kind of think about which of these Accounts might need an adjusting Entry and why So normally the rules for adjusting entries Are that usually cash Is not affected So notice adjusting entries are kind of Kind of the cleanup after the bank Reconciliations Because the bank reconciliations give you that huge Internal control over cash And not only cash But the other side of the cash transactions All the transactions that cash is touching Are basically Being double checked to some degree With the bank reconciliation process So then You've got the adjusting entry process Which is usually classically A normal classic adjusting entry Is dealing with timing issues Accrual versus cash kind of Timing issues, when is revenue recognized Kind of issues So that means that normally cash is not going to be affected And you're usually going to have One balance sheet account And one income statement account Affected when you're doing The adjusting entries That's not always the case You can think of other situations That we might even look at Where only like two balance sheet accounts Are affected But a classical adjusting entry Is usually a timing adjusting entry Which means it has a balance sheet And an income statement account Which are entered and they're always entered As of the cutoff date Which in our case we're just going to say Is 228 at the end of February Because that's when we're imagining That we're going to actually be reporting The financial statements If you did them monthly of course We would need them done to make your financial statements Correct as of January And then February But we're just doing it as of February Assuming that we need our needs met Or we need to financial statements reported As of the end of February So we want to make sure our books are correct As of that point in time Note also When we try to make something Correct as of February 28 You might be thinking Well that's kind of an arbitrary date Because if I make things Correct as of February 28 They weren't necessarily correct As of February 27, 26, 25 And that's correct, that's true We're not trying to make the financial statements Correct as of every given Point in time Because the point of the adjusting entries Is to say that we cannot do that We're going to recognize And make everything correct As of every given point in time Because that would be too tedious And we'll see some examples of why that would be too tedious And therefore I'm going to make it as correct as I can As of the point in time That it needs to be correct For external reporting purposes Or for taxes typically Is that point in time Which is usually the end of the month The end of the quarter And or the end of the years Now also note that When we put adjusting entries in We're going to do that with a journal entry Or something like that usually And not with data input forms Because there's no data input form These forms are designed To facilitate The transactions In a normal accounting cycle All of these forms So there are no forms For an adjusting entry Because there are adjustments at the end of the period And therefore you use a journal entry To do them usually The journal entry might mess up The normal timing Of whatever accounting process we are in So that's why you might also have Reversing entries So we might do an adjusting entry As of the cutoff date, February 28 Making our financial statements correct Based on whatever kind of accounting system We're using An accrual accounting system Or tax-based accounting system, for example February 28, the day after We might reverse some Of those transactions we did Because the transactions we had to put in place Were just timing transactions We just wanted to make it right As of a certain point in time But if I leave it there, it's going to mess up What the bookkeeping is doing For example, payroll For example, payroll runs Wherever payroll runs If payroll is running bi-weekly Semi-monthly Or monthly Then even if the payroll Lands on an odd day For example, if I'm on February 28 Cutoff and the payroll Is run February Or on March 3rd or something For a two-week time period Then some of the payroll Is actually before the cutoff And some of the payroll is after the cutoff So on an accrual-based system What we would need to do is recognize Some of that expense in February And some in March Even though if we just run the payroll It would already be recorded in March Because that's when you process the payroll And so What we don't want to do is mess up the payroll I don't want to say, hey payroll department What you need to do is cut the payroll check In half and put part of it Because payroll is already too complicated Right, we're going to recognize The payroll is too complicated to do that I don't want to mess up payroll What we're going to do is just make an adjustment To make it correct as of the end of the period And then reverse it Because it's just a timing difference So that we don't mess up payroll While still being able to get the reports right As of a point in time So that's the general idea If we just look at some of these accounts Like cash, again, no adjusting entry for cash Usually accounts receivable Could have adjusting entries to it The classical accounts receivable Adjusting entry would be a situation Where you Have a cutoff problem For example, it's usually in a job cost System, so like If you're in a law firm And you bill out your time for the staff And the staff has been working For the week Before February And then you counted their time But you didn't actually create the invoice Until March March being after the cutoff date The work was done in February And on an accrual based system You should record revenue When the work was done Not when the invoice was generated And when you see people trying to Adjust their books or trying to Report more or less income To either look better for a loan If they're trying to get a loan, they're trying to look good Or look worse for taxes Meaning In the United States income tax So income is actually bad If they're trying to look better or worse They're often going to shift The timing of the invoice Or the sales receipts Because that's what the first thing Would come to mind would be If I don't want to pay as much taxes And you were trying to cheat the system or whatever What would you say, well I can just Push the invoice out into The next Period after the cutoff And that will lower My revenue And the other side Will be in accounts receivable So that's what you're kind of... You can see people doing that intentionally You can also imagine that happening Not intentionally Such as a situation where you build someone In March As your normal accounting process Even though the work was done In February and then technically You should pull it back to February If you pull it back to February Then you have this timing difference problem Entered it in two times And you have to do a reverse in entry So there's where you have that reverse in entry Inventory Usually inventory is fairly Straight forward because you'll have a physical count So often times with the inventory You could have cutoff situations In terms of the period in cutoff situations And you want to basically tie out The inventory to the physical count At any given time For the inventory We have the prepaid insurance Now there's a classical This is a classical adjusting entry Prepaid anything Would be an adjusting entry Insurance is classically used as an example Because insurance By its nature You pay for it before you get the insurance It's the same concept however With The fixed assets down here So let's take a look at that one first You might try to say I'm on a cashed based system To deal with these adjusting entries at all But if you're in the United States You're gonna have to deal with taxes At the least And taxes are gonna force you Even if you're on a cashed based system To record things like property, plant and equipment Using an accrual concept Which is similar to a prepayment It's basically a prepayment kind of concept And the reason is because obviously If you buy a building for $100,000 Even if you paid cash for it It would look a little ridiculous Since the entire building When you purchased it Because you're not actually consuming the building When you purchased it You're gonna be consuming it for multiple years Into the future So it would be such an extreme difference Between when you consume The item which is when you should record it As an expense on an accrual basis And when you paid for it That even if you're on a cash basis You gotta record it as an asset Now on the furniture Then we actually have a different account To record the decrease In the fixed asset Meaning depreciation Meaning we're gonna allocate the cost Over the useful life Trying to allocate the expense to the same time period That we earned the building With another account Which is gonna decrease the fixed asset Total account And the other side's gonna go to An expense account The reason we do that Is because this is just an estimate Meaning I don't know how much of the building We actually used up I'm just trying to allocate the cost Over how long I think the building Will be useful Whereas if I look at other prepaid Items like insurance for example We don't create another account Called accumulated or Amortization of insurance Because we know exactly How much insurance we consumed We paid for the insurance Gave us any insurance Over anything And I know how much was consumed Because I know how much time Has passed from the policy So what I can do in here Is go periodically into here And make adjustments as of the end of the month Reducing the prepaid insurance Directly and recording Insurance expense Now note that if you pay insurance monthly You might just pay it on a cash based system Might not be a big deal In the entire years worth of insurance Then you start getting into the situation Where it starts to make a difference It might be material Might make a difference in your decision making processes And therefore you have to do this A cruel kind of thing possibly We've got the short term investments These are investments in things like stocks and bonds Oftentimes if you're a small Business you're not going to have investments In the stocks and bonds in your business Because you're going to take the money From your business Give it to yourself in draws And then invest in stocks and bonds Personally Because this business for example Is not in business To make revenue from dividends and interest But rather to sell guitars And have guitar lessons So Oftentimes there's not going to be an Adjusting entry possibly I've related to the investments For many small businesses If I go down to Let's say we did the equipment Equipment liabilities Accounts payable Usually you could have some cutoffs Issues with accounts payable But usually accounts payable Is fairly straightforward You might have some Cutoff issues again with When the expense was actually being recorded On the accounts payable But I don't think we're going to do An adjusted entry for our accounts payable Here the loans payable In this situation where You have a little bit different Of an adjusting entry often times With these loans Because if you compare the loan To something similar as like a mortgage You might be paying the loan off On installment Meaning on a monthly basis And so usually When we have to report the loans We have to report a short term And long term liabilities And if you're paying them off in installments Both a short term and long term liability With the loans So we need to break out the short term And long term portion Now there's a whole lot of other different strategies You might use as a bookkeeper To deal with the loans Because it also has a problem With the reporting Of the payments To break out the interest in the principal According to the amortization tables Because you can't just automate that Because the Breakout between interest and principal Differs So you might also come up with another strategy To say I'm going to try to make my financial statements Completely automated Through the bank feeds And then have an adjusting entry at the end of the period Month or year that is In order to break out the short term Long term portion As well as the interest And tie out the ending loan balance To what's on the amortization table periodically And so that Method can allow the Bookkeeper to really streamline the Bookkeeping and then just do periodic adjustments And let the accountant Or tax preparer do that periodically Also notice If you're small business, you might not need to do that Because You might just be reporting a schedule C Which is only in essence an income statement So you don't really need to break out Short term and long term loans Unless you have to record a balance sheet On the tax return For external reporting Or you need to do so for internal reporting So we'll talk more about that when we get to that one The federal payroll Now payroll is a whole thing In and of itself So we talked a little bit about the payroll issues One is that the Paydates, month end Monthly payrolls Bi-weekly, semi-monthly May not land on 228 So we might have to do an adjusting entry Particularly on an accrual basis To report our expenses when they were incurred As of 228 So we don't mess up the payroll Department There's also some ideas in terms of How you might deal with payroll If you're processing it internally Through zero with the help of gusto Or externally If you're doing it externally Someone else, you have a professional payroll provider Doing payroll outside of zero Then again The bookkeeper might try to To Be on a cash-based system To streamline their bookkeeping in zero And use the accountants reports From the payroll provider To help adjust Your books periodically At the end of the month or year For tax needs or something like that So there's a lot of different strategies You might put together for payroll The sales tax is usually Straightforward if you're tracking the sales tax Through the system I don't think we'll do an adjusting entry For that, the unearned revenue There's a couple different Reasons you might need to Adjust the unearned revenue Zero has this nice feature That actually records the unearned revenue And tracks it quite well With the accounts receivable So the needs are a little bit different in zero Than other software for some strategies Of using the unearned revenue The classic unearned revenue scenario Is that you record all your sales To unearned revenue If you're in a situation where everything's Being collected in a prepayment Type of situation such as A subscription model to a magazine And then you're going to record A decrease to the unearned revenue And record the revenue as you earn it The credit cards are usually fairly straightforward Because those are similar to cash Because if you were paying for Stuff with the credit card Then you can reconcile the credit card payments With the bank reconciliation process In a similar way we did with cash And then Your equity section Is usually fairly straightforward On the equity section It's the assets minus the liabilities If you're in like a sole proprietorship It's fairly straightforward If you're a partnership or something like that A partnership Is going to have multiple capital accounts So you have an added issue Possibly of trying to break out The income To allocate the proper income And draws in what not To the capital accounts in a partnership If it's a corporation It's actually a little bit easier oftentimes Because corporations have stocks And therefore you don't have to Track each individual owner Partner type Of capital account But rather the ownership is dependent On equal units and shares of stocks You just need to break things out by Retained earnings and common stocks That's usually fairly straightforward Now oftentimes it's useful to just look at The balance sheet, the income statement Is the other side of the transactions So if I adjust accounts receivable The other side of the transaction Is usually going to be the income account That we're adjusting, that's why it's a timing difference If we make an adjustment To payroll Then the other side of the transaction Is going to be a timing issue With the expense, payroll expense Or payroll taxes related to those accounts Maybe there's going to be a balance sheet And an income statement account The income statement account being the Timing account Which is the statement that you need If you're doing taxes For like a sole proprietor Like tax business It's the minimum that you're going to need If you have a larger business You might need the balance sheet as well But at the minimum for taxes In the United States You're going to need an income statement Of individual items here When we might enter them And when we might need reversing entries for them