 QuickBooks Online 2024. Adjusting entry accrued interest. Get ready and some coffee because we're getting the business on target with QuickBooks Online 2024. First a word from our sponsor. Actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us but but that's okay whatever because our merchandise is 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. Here we are in our Geek Great Guitars 2024 QuickBooks Online sample company file we set up in a prior presentation. Open the major financial statement reports as done every time the reports on the left. In the favorites we're going to right click on that balance sheet to open a link in a new tab. Right click on the P&L to open a link in a new tab same with the trustee trial balance. Let's tab to the right close up the hamburger and change the range up top going from a one oh one two four tab oh two twenty nine two four tab. We're going to put a month by month side by side and run it tab into the right closing up the hamburger and we're going to do it again on the range change oh one oh one two four tab oh two twenty nine two four tab month by month broken out running to refresh it one more time tab into the right closing the hand boogie changing the range oh one oh one two four tab oh two twenty nine two four tab we're going to select the month by month breakout run it to refresh it. Let's go back to the balance sheet last time we gave a general overview of the adjusting entry process typically done at the end of month or a year we're doing it at the end of February because we only have two months of data input in order to get the financial statements as close to as possible the accounting basis usually an accrual basis but possibly you would need a similar kind of thing if you're doing a tax basis for the end of the year so you can get your taxes done so we're first going to look at the accrued interest so this is going to be related to the loans down below so let's go down to the loans here with the loans we're going to have a few things that we need to be doing with them one is that we have to make sure that we break out the interest note that this could be done a few different ways if you are a bookkeeper you might try to say hey look this is a pain for me to break out the interest and accrual portion every time I make a loan payment because the difference between those two change every time and I can't automate the system so one thing you might do is you might say hey look I'm just going to record transactions that clear the bank feeds by just recording them as a reduction to the loan and then I'm going to realize that I'm not properly recording interest but rely on my CPA or accountant at the end of the year to make an amortization schedule and break out the interest portion versus and get the loan balance to be correct that's one issue another issue is that or or you might do it periodically based on the amortization schedule we would make the amortization schedule and record the proper amount of interest and principal per loan payment another issue is breaking out the short-term and long-term portion of the loan something necessary for external reporting if you're going to be providing the balance sheet but not possibly necessary if you're doing it just for taxes and you're just looking at a schedule C because it's just the income statement so that would be a breakout between two balance sheet accounts another issue that could happen that we're going to look at here is is that we have accrued interest that we need to be that we need to be accounting for as well so that's going to be the one that we're focused in on this time so we're going to focus on this one particular loan we're going to make an amortization schedule related to that loan and think about this accrued interest situation so let's go into it this was our amortization schedule for the large loan that we put together to break out the loan payments I'm going to make another schedule over here I'm just going to add to it and I'm going to call this first one like loan one or loan one and I'll call this one just loan two loan two and I'm going to make a quick amortization schedule just so we get an idea I'm holding control and scrolling in just so we get an idea of what's going on with the payments and then why this adjusting entry might be necessary in some cases so I'm going to select the entire worksheet by selecting the triangle right clicking on the worksheet format the cells I like to lay down the foundation like laying down a base beat on when I'm doing my my wraps or something or I don't know what I'm talking about I'm going to say none on the on that and we'll say that we do want the decimals so I'll keep that and then I'm going to go down to the to the home font group make it bordered and then I'm going to put the information about the loan on the left so I'm going to say the loan amount was five thousand dollars we're going to imagine it's just a three month loan so it's only three months long because we're going to try to maximize the amount of interest so it's relevant and then I'm going to say the rate is really high because it's a short-term loan again I'm trying to maximize the interest rate so we can see an adjusting entry that would be relevant point three five thirty five percent I'm going to say home tab numbers percentify that now note that that would be the rate on a yearly basis so a rate on a monthly basis this would be the rate per year and that's often the rate that would be assumed if someone doesn't say year or month but we're actually paying it on a monthly basis so we could break it out to rate uh rate per month month which would be then equal to the 35 divided by the number of months in a year 12 and then if I percentify that home tab numbers percentify adding a couple decimals we get something like that notice there's a huge difference there this is a big you know rate which people can try to make sounds smaller if they break it down to a monthly a monthly rate so we have to be mindful of that and then I'm going to calculate the payment with our payment calculation I say negative I usually start it with a negative PMT and then brackets and we're going to pick up the rate we could pick up the 35 divided by 12 or just this number noting that this number is actually longer than this because it extends beyond two decimal places so you just you don't want to type in 2.9 2 percent or 0.002 you want to use that cell and then comma the number of periods is three and months not years so those two things have to be matching and then comma the present value is the loan amount so we're going to say okay so there's the amount of payments that we would be making on a monthly basis we can say okay that would mean that the total payments payments that we would make over the life I'm going to make this a little larger of the loan would be we're going to make three of those this times three and that means that the total interest over the life of the loan would be equal to the total payments minus the loan value so 294.46 okay let's break this out on a period by period basis now so I'm going to I'm going to make C thinner a skinny C and then I'm going to put the periods periods and payments and interest and then I usually do two cells here the loan reduction because it's going to be long and instead of having it in one cell and wrapping it I'm going to put it in two cells so it doesn't make a fat or long-nosed one like a horse with a long nose we want I'll just make it two cells so loan balance balance hold on sorry about that now I have got my sound board I hit the keys for the sound board all right let's go ahead and center this and then I'm going to go in the font group and make this black and white and then let's make this home tab font group and bordered okay and then the periods I'm going to imagine let's make this a date format so I'm going to select the whole column D and I'm going to make this formatted to a short date so that I can say the first is going to be oh two 15 24 and then oh two 15 20 oh three oh three 15 24 and then oh four 15 24 and we could probably copy that down to get the last one oh five 15 24 we're going to put it on the books we're going to imagine we put the loan on the books on two 15 of five thousand and then we're going to make three payments we'll imagine they are installment payments now note they don't necessarily we might not be making basically monthly installment payments it might be a case with a loan such as this that we're going to pay it all back you know after uh three months in which case the interest calculation you know might be a larger over that time but let's let's say we're going to make monthly payments so what would that look like well the payment's going to be the same amount it's going to be this I'm going to select f4 on the keyboard dollar sign before the b in the five because that's outside of my table so when I copy it down I want it to move down and then I can copy this down and I'll get the same amount all the way down and then the interest per month is going to be equal to this five thousand times not the yearly rate if I take that I would have to divide it by 12 or I can just multiply by this monthly rate noting and remembering that this is longer extended beyond just two decimal places so I'm going to say okay and then the loan reduction is going to be this payment amount minus the interest the rent on the purchasing power meaning that the loan balance is only going to go down by that even though we paid that therefore the loan balance is five thousand minus the one six one eight ninety nine this is the new loan balance I would like to copy this down but if I copy it down this cell is going to move down that's a problem therefore anything that's outside the place I'm working on I want to use an absolute reference so over here in b4 I'm going to put an absolute reference f4 dollar sign before the b in the four enter then I'll select these fill handle I could just double click on it boom and copy it down so there we have it and so let's put some borders around it to uh home tab font group and some borders so we're going to imagine that the interest was on the books at five thousand and we haven't we haven't yet made a payment right and in 15 days have passed so we have actually used half of the interest right so so if we break it down we've actually consumed in essence half of the interest at this point in time because 15 days have passed I'm not going to pay until next month so technically I should be picking up the interest here that has actually been accrued which I have not paid yet which of course would be interest of this divided by two now in our example problem this is a small uh fairly small dollar amount so it might not be significant it might be what we call in material and therefore you don't really possibly need an adjustment for it but you can imagine a situation if it was a you know a larger loan that this 15 days of interest expense could be a significant dollar amount and it's going to it's similar to like rent oftentimes people have a better idea of being able to to visualize rent if for example uh you have an office building and they gave you and you were allowed to use the office building and then pay the rent at the end of the month or the end of the year then even though you haven't yet paid the rent cash hasn't happened you still consume the expense you're in you have to pay the rent because you've consumed it you've incurred it therefore you should be recording the expense the expense and that in those cases is usually kind of good from a tax standpoint because obviously we expenses are deductions possibly and you might get a deduction for that so that's going to be our adjusting entry i'm going to say okay we we're not going to actually pay this interest until next period but we should be recording 72 92 of interest now remember this is this adjusting entry this whole amortization schedule is something that as a bookkeeper we might say hey i would like the tax preparer to deal with that for so from from us an internal bookkeeping standpoint we might use this amortization schedule to help us break out the interest and principal portion every time we make a loan payment so that we tie out to the loan balance in which case you'd still have to do possibly this adjusting entry if it was significant right or again we might as the bookkeeper say hey look i'm just going to record each of these payments as a reduction of the loan balance ignoring interest and this accrual for the 15 day situation and you tax preparer or accountant at the end of the year can construct this amortization schedule and then break out the proper amount of interest according to the amortization schedule and do this added accrual adjustment if you think that 15 days is necessary and by doing that notice again the bookkeeper can or if you are the bookkeeper and the tax preparer you still might do that because then you can automate your payments i can automate these payments to happen automatically through the bank feeds not having to break out a difference between the principal and interest and at the end of the year i'm still going to possibly have to create the amortization schedule if i have to do this entry anyways so i might as well possibly do the whole thing you know at the end of the year that might be a little bit easier of a system just just to point that out okay but right now we haven't had a payment happen yet so we're just going to record the fact that that 72 92 is interest that we should be putting on the books as of now so let's go back to the first tab and we can do that with if i hit the drop down we typically want to do these with journal entries note that there's no forms for these adjusting entries because these adjusting entries are not part of a normal cycle they are adjustments and the fact that we'll be using journal entries will make it easier to see that these are adjusting entries uh so we're going to make all the adjusting entries as of the end of the period we're going to put a memo saying they're adjusting entries and we're going to use generally journal entries all of those things being somewhat unusual making it easy to see where the adjusting entries are happening so let's but we don't really we might not do it with a journal entry if we can use a register it might make it easier since there's only two accounts affected so let's look at the register situation if i go to the transactions uh and then the chart of accounts you'll recall that there is a register not just for the checking account but for every balance sheet account so in here we're going to we're going to do an adjusting entry for for basically two uh balance sheet uh i'm sorry for one balance sheet account now we notice we're looking at this loan right here so this so you can you can imagine that we own we have a liability of the interest on the loan that has accrued typically we will not put that in the same loan account we might call it interest payable that's what i would typically call it right interest payable or accrued interest i like the term payable more accrued interest is possibly more uh i don't know classical of a name it's an interest that has accrued up that hasn't been paid but payable sounds to me like a liability and it seems more clear so that's what i will use so i'm going to make a new account and i'm going to say it's a liability account it's going to be an other current liability to do so we're going to say it's going to be in other current liability and we're going to call it uh loan payable let's just call it other current liability and i'm going to call it interest payable interest payable all right and then i'm going to say why is the e out there like that that's weird and then i'm going to say save and let's find that account now so it's an other current liability account so i'm looking at my my accounts here assets fixed assets other current liability now it's an alphabetical order here's the interest payable that's the one we just set up let's go to the register and that one i'm going to now do a journal entry in the register so i'm going to go to a journal since there's only two accounts affected and i'm going to say as of 022924 since we're in the leap year here so that's going to be the cutoff date all of our adjusting entries are as of the cutoff date you might say hey well wait a second that's a problem because why it's going to be wrong as of the 28th because as of the 28th we should have had you know 14 days and notice it's not really exact because there's a leap you know 15 days is i'm assuming half a month so we're still doing some estimates which you're going to have to do most of the time because uh because we're going to say if it's immaterial then you know we're going to try to get it to the closest we can often using estimates right that's what has to happen but you might say hey look it's not right as of the 28th because there were still like 14 days or whatever that would not have been recorded as of that point in time of expense and and that's correct it's wrong as of before that or imperfect as of before that time with all of the adjusting entries for the most part and we're accepting that we're going to say that's fine because we're going to we're going to say that we're we want a process that works from the bookkeeping standpoint internally and we're not going to mess it up just to have everything perfect every single point along the way in time but rather make it as easy as possible and sacrifice the exactness during the month so that at the end of the month or year we can then just do an adjusting entry getting it right at the point in time that we have external reporting in the format of tax returns and or possibly financial reporting all right so we're going to say this is going to be then i'm not going to put a payee i'm going to put a adjusting entry so notice all of my memos i'm going to put there's an adjusting entry so that means notice if there's a separation from the bookkeeper and the adjusting department or even if you're doing your own adjusting entries then it gets confusing in terms of why why did the bookkeeper is going to say what what happened here the accountant did something and it messed up my accounting well we want to clearly identify that this was an adjusting entry so if there are questions about it we can ask the question so we will identify that it is an adjusting entry by one putting a memo two putting them all as of the end of the period month or year whatever we're working on and three they're all going to be entered using journal entries which is a form not often used in the normal accounting process so then we're going to say this is going to increase 72.92 and the other side is going to be going to interest interest expense so we called it interest expense and we have these sub accounts i'm just going to say interest expense all right and so this is so that's going to be the journal entry so let's go ahead and save it and check it out if i go back into it and and i was to edit it then it's going to take me into an actual journal entry you might feel more comfortable doing journal entries if you have a a bookkeeping background that's totally fine i'm going to put the description in both sides you could just use a journal entry which would be a credit to interest payable and the other side the debit going to interest expense i'm just showing the register and how we could use it which would often be a way to do it if you only have two accounts affected if you have more than two accounts affected the register is going to be more difficult and debit and credit really is is the way to go but let's go ahead and save and close we'll see that in future presentations balance sheet if i run the balance sheet we're going to run it and then we're going to go down and say that we have down here in our payables interest payable 72 92 72 92 if i go into it we can see that it it's marked clearly as an adjusting entry and it is a journal entry and if i go into that journal entry it'll take me to the form which is the default form if no other form is to be used of a journal form in the form out of debits and credits closing that back out the other side on the income statement let's run it to refresh that we have interest income towards the bottom here it is if i go into the interest income we have more there of the 72 92 so we have impacted the income statement let's go back we have increased the expenses which is going to decrease the net income on the year for interest that has accrued because we've been using the purchasing power of money for which we have not yet paid because we're going to pay it in the following month paying it in accordance with the amortization schedule now the next question is well should there be a reversing entry for the transaction is this a temporary kind of transaction is it going to confuse the the bookkeeper now this first one notice you could kind of leave it there and just tell just tell the bookkeeper yeah this is this is going to be uh the the where did it go the the the interest payable is going to just be sitting there don't do anything to it just pay off your loan payables like normal and then we'll make another adjustment as of the end of the next month or the next period where we need to make an adjustment for it or possibly you could simply reverse it and then as of the first day of the following period so that again you don't confuse the bookkeeper so this this is one I think it can basically go either way it's probably not going to be in the way of of messing anyone up because it's not actually impacting the loan balance if you break it out into its own separate account but you might choose to reverse it just so you're back to the normal point that's what we're going to do next time to see uh the reversing entries note that sometimes when we look at these reversing entries we have to determine is this a timing difference or is it is it a temporary difference or is it a permanent difference that uh we are recording so we'll kind of go over why we we might reverse it next time by looking at uh the journal entry that would happen at the next payment in other words next time the bookkeeper makes a payment here uh if they have to take this 72 92 into account that's going to make their journal entry their payment even more difficult if they're doing it according to this amortization schedule if they're trying to reverse this payable account as they make the payment and we don't want to make anything more difficult on the bookkeeper so so that's why we could say maybe we'll just reverse it and make it correct as of the cutoff date and then and then change it so we'll take a look at that uh next time but now let's go back on over and I want to open up my my uh journal report so if I go to the reports on the left we can look up a journal journal report and so this is often a report that you might use to present the adjusting entries that we've made so notice this report gives a journal entry format for every type of transaction every form type so but if I look at just the ones that happen at the end of the year so if we go to a custom date as of 0 228 24 or 229 24 0 229 24 because all of our entries were made as of the last day then this will limit the amount of journal entries that we will have we still had our paychecks at the end here uh and but here's our journal entry that was actually a journal entry form we can then sort this for this by transaction type which would be simply the journal forms so if I filter this I could say that I want to filter by transaction type and it needs to be equal to a journal a journal entry and so we're going to say okay and so now it's limited to just the journal entries and so notice I still have two entries because I had this payroll adjustment that wasn't an adjusting entry so so then if I wanted to filter this down further I could export it to excel and just delete this one this one item but I just want to show this report because this is a common report that we might use to then explain what we did in the adjusting department especially in a situation where the accounting department uh is or the bookkeeper is different than the person doing the adjusting entries and you're trying to say hey look this is the adjusting entries that we made in order to do the taxes or external reporting uh or whatever we needed to do all right let's go to the trial balance now this is where we stand on the trial balance so we've got the balance sheet on top of the income statement here best report to check your work basically all the assets checking accounts and asset counts receivables and asset inventories and asset investments and asset payments to deposit asset prepaid insurance asset furniture and fixture asset the accumulated depreciation contra asset machinery and equipment asset those are what the company owns then we have the liabilities and equity the flip side of the coin who has claimed to those liabilities or the value of them liability who has claimed to those assets liabilities and equity so we've got the accounts payables a liability visas a liability sales tax liabilities we've got the uh interest payable is now a liability we've got the loan payable liabilities to the bank we've got the payroll to the government liabilities to the government unearned revenue liability to the customer for prepayments and then we have our claim to the balance including the owner's equity which is draws the owner investment and the owner's equity similar to retained earnings if it was a corporation and the entire income statement income being credits minus expenses being debits the difference between the two resulting in a credit balance if there was net income which would then roll into the owner's equity equivalent to retained earnings for a corporation and quickbooks does that automatically on a yearly basis which we can see if we go up one date 010125 to 010125 we'll see that the income statement closes out everything rolls into equity the equivalent of retained earnings