 QuickBooks Online 2024, adjusting entry for prepaid insurance. Get ready and some coffee because we're making our books divine with QuickBooks Online 2024. Okay, maybe the books aren't exactly divine, but they're still pretty darn nice. Here we are in our jik, great guitars, 2024 QuickBooks Online sample company file. We set up in a prior presentation, opening the major financial statement reports as done every time. The reports on the left and the favorites were right-clicking on that balance sheet to open a link in a new tab, right-clicking the P&L to open a link in a new tab, the trusty TB same thing. Tabbing to the right, closing the hamburger, change the range, going from 010124 to 022924. Let's do dropping it down to see month by month and a side-by-side run it. Tabbing to the right, closing the hamburger again, changing the range. 010124 tab, 022924 tab. Drop down month by month, side by side, refreshing the reports. Tabbing to the right, right, repeating the process. One more time. Uno vase mas, 010124 tab, 022924 tab. Drop down month, run it to refresh it. Let's go back to the balance sheet. We're now doing another adjusting entry. Those entries done at the end of the period, typically month or year to make the financials correct. 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, trust me, I'm an accountant product line. Yeah, it's paramount that you let people know that you're an accountant. Because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep, complex and nuanced questions. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. As of whatever accounting basis we're using, typically in a cruel basis, but could be for a cash basis or possibly a tax basis if you're doing this for tax purposes. We're now looking at the prepaid insurance. Prepaid insurance being the classic type of prepaid type of adjusting entry, noting that anything else that's prepaid, you'll have a similar kind of question. In other words, you could imagine prepaid rent or prepaid expenses of any kind, prepaid telephone bill or utility bill or so on and so forth. So the concept is actually the same as we will see when we get to the fixed assets. I just want to touch on that because many times with the fixed assets, we intuitively do the accrual thing. Whereas with the prepayments, it's still something we have to kind of think about as to why we would do it this way. It's a little bit more complicated. So note with the furniture and fixture if I was, for example, to buy a building for let's say a million dollars. And we had the cash. We had the cash to do it. So we threw down a million dollars for our building. If we were on a cash-based system, you would think, okay, well, I'll just write it off as a building expense, one million dollars. What is that going to do? That's going to cause a comparison problem in the month that we purchased the building to the following month or the year we purchased the building to the following year. It's going to look like we had a huge loss in the year of the purchase of the building, which isn't exactly correct because, of course, the building is more of an investment. So it would throw off our comparison of performance. That's why we have the accrual type of system. Note that that would be the easy thing to do because then it would roll through the income statement into retained earnings and we wouldn't have to depreciate it or do any of that kind of stuff. But we intuitively know that I can't do that. We're going to have to put it on the books as an asset. That just makes sense. The building is an asset. We're investing in the building to help generate revenue into the future and we should be allocating the cost over the useful life to try to match, to be in consistency with our matching principle. That's what depreciation is. So the prepaid insurance has a similar kind of scenario except we don't have to break out a separate account of accumulated depreciation with the prepaid insurance. Why? Because the prepaid insurance is not an estimate. We basically know how much we have consumed over time, whereas the building when we allocate the cost over time is an estimate of how much has been consumed. There's still one building. So how do I know how much it went down in value by? That's kind of why we break out this separate account. So with the insurance, how does that work? Well, when we pay for the insurance, by definition insurance is normally different than other types of things that we pay for in the normal course of the business because most stuff, we get the use of it and then pay for it, such as the phone bill, the other utility bills, the electric bill, the water bill, and that kind of thing. We get the use of the service, they see how much we used, and then they build us for how much has been used. Therefore, we're entering the bill for work that was done already in the past or close to the current month is the idea. So we're just going to expense it as we get the bill. But with insurance, by definition, we have to pay for it before we actually get the coverage unless you have some new wacky government insurance that doesn't make any sense, right? They're going to insure people after you get in an accident or something for a car engine. That's not going to work too well, but that's something the government might think of because they don't think of things that work too well. But in any case, so that means that we have to pay for the coverage before something happens. If you're thinking about liability insurance, for example, then we're going to have to pay for the liability insurance before some crazy person comes in and claims that they stubbed their toe on a tile or something and sues you for $2 billion or something like that. You're going to have to have the coverage before the lawsuit happens or else they'll just sue you. Actually, it's probably more dangerous to have the coverage. They won't even bother to sue you if you didn't have the insurance and didn't have any money. But us, we're trying to do well here. We want to have the money. And so then we're going to insure ourselves against the crazies that are going to try to sue us for stubbing their toe and whatnot. So here we go. So how can we account for the insurance in that case? Well, the easy thing to do, just like with the building example, is when we pay for the insurance, we just expense it. We just put it over here as an expense. And if you're paying insurance on a month-by-month basis, you might be able to basically get away with that because it's close enough to when the actual coverage was done and it might be an in-material amount, meaning it's not going to be a big impact on your decision-making process. So maybe that's something that you can do. But when you start to prepay the insurance for more of a longer time period, say you pay for an entire six months or a year, then you're going to run into the same problem we had with the building because if we expense an entire year's worth of insurance in, say, January, and then I compare January to February, then it's going to look a little bit messy because January will look worse because I actually paid for insurance, which, like the building, will benefit future time periods. So the concept would be we'll do a similar thing as with the building, we'll have to put it on the books as an asset. Now, if you're a small business, you might be thinking, well, you know, I can deal with just expensing it because that's easier and maybe I want to do that. So then the question is, well, what's the purpose of your financial statements? Possibly it's for taxes. So you might want to talk to your CPA firm and say, what would be the best way for me to deal with this for tax purposes? You might be able to simply expense it if you would like to do that and then ask your tax preparer or the adjusting entry person at the end of the year to do whatever they need to do with an adjusting entry. Say, hey, look, I've expensed all of my insurance here and if you need to put prepaid insurance on the books, here are my insurance documents. Here's the coverage that is being covered and you can make an adjusting entry if you so choose. But if they need to break out the insurance, it's likely that they would rather have you put it on the books because it has prepaid insurance on acid, which is still pretty easy to do from a bookkeeping standpoint. So this is the traditional way that we would do it. We would say, hey, look, when you pay for the insurance, what you're going to do is not expense it to insurance expense, but rather put it into a prepaid insurance account. That's going to make it easier on the adjusting entry process. Why? Because the expense accounts are temporary. They close out into retained earnings, which kind of messes up the adjusting entries a bit. Whereas if you put it on the books as an asset, then we can easily then look at the insurance coverage, see how much of the insurance has been consumed and make an adjusting entry. So it's still pretty easy from a bookkeeping standpoint to do that. You might need to work with your tax preparer. You need to let them know, hey, look, I'm putting all of my insurance with the use of the bank feeds into a prepaid insurance account. I'm not doing any adjusting entries for them. I would like you to do the adjusting entries for them. I'm just going to keep on increasing prepaid insurance. I will give you the coverage at the end of the year so that you can make the proper adjusting entry and expense the portion of prepaid insurance. That might be a method that you can use. Also note that if you have multiple insurance accounts, you might want to make a parent account for insurance and then put the different types of insurances underneath it. That might make it a little bit easier. So if you had car insurance and then you had liability insurance and so on and so forth, you can list those different types of insurance so that when you do the adjusting entry, then you can look at each of the individual insurance policies to see how much of the insurance has been consumed and how much has not yet been consumed. Then we can think about, what's the insurance calculation going to look like? Well, if I just put the prepaid insurance, if I go into this insurance account, you can see we put it on the books with just a check. We paid for it $12,000. We're going to imagine that it was for an entire year's worth of insurance. We're imagining that that insurance started on the February. Let's say February and this is of course just to kind of make it easy. So let's pretend that that $12,000 payment was for liability insurance, which starts on February and then goes for an entire year after that point in time. So that means that if I look at that policy, then I pay for it in advance in a year and now we're doing our books as of the end of February. So one month has passed. What do you mean I have consumed then one month of the 12 months of insurance? You might say, well, the insurance company didn't give me anything in that month. How did I get anything? What do you mean I've consumed the insurance? I only get something if someone stubs their toe and they sue me. But we're hoping that that doesn't happen. So we're hoping that the fact that we have the insurance covers us in the event that that happens. So although we didn't get anything from the insurance, we did get something. We got coverage. We got the safe of mind that if the crazies come in and stub their toe, I'm not going to worry about it too much. Hopefully and hopefully the court won't rule that they're going to get billions of dollars for some crazy story. But given the track record, it might happen and it's annoying, but hopefully we have insurance. So we're going to do that with a journal entry. Now we could go to the journal entry. So if I took the 12,000 divided by, what did I say, 12,000? Yeah, 12,000 divided by 12, that's 1,000 a month. One month has now passed. Therefore I'm going to expense one month of the coverage. That's the calculation. So we could do that with a journal entry. That's going to be our classic form. It's an adjusting entry. So we want to mark that off by saying I'm not going to do it. I'm going to do it with a journal entry form, not one of the standard forms. We're going to mark it as of the cutoff date 229 in our case and mark it as an adjusting entry in the memo. But there's only two accounts affected. So we could use the register. So let's do that. We'll look at both formats. But if there's only two accounts affected, we can go to the register and we can look at the account that is the balance sheet account. This is a classic adjusting entry in that there's a balance sheet side and an income statement side because it's a timing difference to see when we're going to be recording the expense. The registers are linked to the balance sheet account, which is prepaid insurance. So let's go into prepaid insurance. There it is. There's the 12,000. Open the register. I'm going to select a form, which will be the journal entry, journal entry form. And we're going to make it as of the cutoff date, which in our case is 022924. If it was a tax for taxes, it would be the end of the year, probably 1231, right? And then we're going to say that the memo is an adjusting entry so that we can clearly define it as an adjusting entry. It's going to be a decrease. And we're going to say a decrease will be a credit, in this case, by the way, which we'll see shortly in the debit and credit format. $1,000 has been expensed. The other side, do we have an insurance expense provided by QuickBooks? So they put an insurance parent category and then business insurance, liability insurance, property insurance. This same format might be how you would like to set up your insurance on the balance sheet for prepaid insurance accounts as well if you have multiple insurances so that you can do a similar process and track each of the insurance items. But let's choose the liability insurance. And so I'm going to say, all right, that's it. Let's go save it. And then let's go back into it and check it out in journal entry format. So if I edit it, it will show it in journal entry format. There's the journal entry. I'm going to copy the description here to here. And we can see that prepaid insurance is an asset. We're making the asset go down by doing the opposite thing to it as it's normal balance or credit. And then the insurance expense. Expenses always go up with the debit. So we're increasing the expense, which will decrease net income. All right, let's go ahead and save and close it. Check it out, balance sheet, and run it. And then we can go down to the prepaid insurance. It's at $11,000. Does that make sense? Well, $12,000 is what was paid divided by 12. That's $1,000 a month. One month has passed and therefore we have prepaid 12 months. So this times, one month has passed. So we still have prepaid 11 months times 11. And that's the $11,000. So that makes sense because 11 months are still yet to be consumed as of the cutoff date of $229. So if I go into that, there's our adjusting entry. So we can see clearly it's an adjusting entry. That looks good. So from the bookkeeping standpoint, it's easy. We're just going to be setting up our bank fees just like we normally would. And we can memorize the account and just make it, instead of going to the expense, we put it to the prepaid insurance just that will work as long as we know that in the adjusting process that we do possibly or our accountant does, needs to then decrease the insurance and record the proper expense. If they don't do that, then you're going to end up with a problem because the prepaid insurance is just going to keep on going up forever and we're not going to get the expense, which means we're missing the deduction possibly for income tax purposes. If you don't trust your CPA firm or something like that and you don't have it, then you might just expense it to make sure that you get the expense on there. But you want to talk and find an accountant that you do trust to do so that you can communicate how this whole prepaid insurance process is going to work between the people involved in it. All right, let's go back to the balance to the income statement and run that. And then we're going to say that down here, we've got the prepaid insurance doneday for crying out loud a star. It's my Spanish, half Spanish, half English doneday for crying out loud a star, the prepaid. So here it is. It's under the category of insurance and then we have the liability insurance. This isn't prepaid. This is the insurance expense, which decreased, of course, the net income. So there is that side of things. If I go back to the balance sheet, I just want to point out that this could happen with anything that you prepaid and this is why the accrual system is thought to be better both in terms of an internal reporting standpoint for your actual decision making and from an external reporting perspective. Because let's say if you wanted to distort your books, for example, then you can adjust the cash payments, right? So for taxes, if we didn't have some kind of idea that we had to expense on an accrual basis, I would like to have more deductions for taxes, right? Well, how can I get more expenses then? I can pay my cash sooner if I was on a cash-based system and the tax code, even if you're on a cash-based system, is going to basically guard against that in some way, shape or form so that you can't distort and be able to take more of the deductions, which are basically expenses early. And so you can see the same kind of thing if it was rent or something like that. My rent expense is a big expense. What if I wanted to increase that for taxes to lower my net income, possibly paying less taxes? Well, what if I prepay like 10 years of rent like this year because I happen to have the money to do it because it was a good year? So I'm going to pay off. Well, the government's probably not going to like that, right? Because you're trying to distort the books for taxes. From an internal perspective, that wouldn't make any sense because if I was to do that on my income statement, it would make it hard to compare my two months. But you can see from an external standpoint, if someone's trying to get a loan, they're going to do things possibly to make themselves look better, decreasing expenses, increasing income to try to look better to the bank to try to get a loan. And the accrual system is working on kind of like the bank side in that case, to work against people doing things that are kind of manipulative, even though it distorts the books from an internal perspective. On the tax side of things, the people might try to look worse. You're trying to look bad, increasing expenses, decreasing income. But if you did books just purely for your own benefit and you didn't have these outside influences that caused people to want to distort their books for whatever external reason, taxes or loans and whatnot, or investments and stuff, then you would still gravitate to an accrual system because it's the best system for comparison. You wouldn't distort your books with it. Just a note on that. If you had like prepaid rent or any other kind of prepayment with a little bit of large payment, you could have a similar kind of thing. Insurance is just the classic example. The concept is similar, basically the same idea as with the extreme examples with property plant and equipment. All right, let's go. If I let's look at my journal report over here. We haven't opened a journal report for a while. Let's go to the reports on the left. And if I go into my journal and check it out, here's our journal report. And let's say we run this for the custom date of 022924 022924. And there's our entries. Now I'm going to filter it by journal entries. So I'm going to say filter by the transaction type, transaction type, which is going to be equal to the journal. Boom. So now this is one way that we can see our journal reports and we can identify which ones are journal or adjusting entries because we tagged them as adjusting entries. We still have this one that we couldn't quite filter out this way, which we could filter out and we'll do at the end of the period, exporting it to Excel and removing that. And this is a way of report that we can use to communicate between the adjusting process department possibly by the tax preparer CPA firm and the bookkeepers possibly. All right, let's go back to the trial balance and see where we stand at this point. Running it. So we haven't done anything to March here. We adjusted just the February numbers, balance sheet on top of the income statement. Assets are from the checking account on down to the machinery and equipment. That's what the company owns, who has claimed to those assets, the flip side of the coin, liabilities and equity, third party and owners starting liability, accounts payable going on through to the unearned revenue. And then the equity portion, starting with the opening balance equity, which shouldn't have anything in it because we closed it out, and then the equity section draws investments, equity similar to retained earnings and the entire income statement, which is credits minus the debits, income minus expenses resulting in a net credit if there was net income, which rolls in automatically with QuickBooks to the owner's equity account on a yearly basis, which is equivalent to retained earnings if it was a corporation. We can see that if we adjust our number up top, our date 010125 to 010125 and run it, we can see it rolls in to the owner's equity equivalent of retained earnings.