 In this presentation, we will enter an adjusting entry related to unearned revenue time to cure our accounting problems with Sage 50 cloud accounting. Here we are in our get great guitars file. We're going to start off by opening up our reports. We're going to go to the reports up top. We're going to go down to the financial statements, opening up that balance sheet reports, and we will open it as of the second period that being February, February. So we're going to say okay. And there we have that. We're going to be considering unearned revenue adjusting entry. Now this is going to be a little bit different than you might think if you're coming from a financial accounting standpoint for the adjusting entry here. And the financial accounting oftentimes the adjusting entry for unearned revenue is a result of recording revenue to basically a liability account as you earn it. If you're in an industry such as a magazine industry or you're selling concert tickets or something, you would always put it into the unearned revenue. And then once the revenue has been earned, move it from that unearned revenue to the revenue account. And that would be the adjusting entry. Here we have a similar problem here. But the issue that we typically have, we had a deposit. We're going to have a deposit that was paid before we got the money before we provided the service of security deposit in this case with regards to a guitar. Now that's going to be the same kind of concept here. We got a prepayment basically. We got unearned revenue. We got revenue before we did the work. Oftentimes in practice however, one of the issues is that if we put that unearned revenue into a liability account, it's not easy for us to track it in the same fashion as we would if it was in the accounts receivable because the accounts receivable is the account that tracks the customer information. And once we create the invoice at a later point in time, we would like to tie it back to that transaction. We would like to tie it back to the prepayment in other words. So if I was to go back to our flowchart here, let's go to our flowchart for the customer section. Typically the flowchart, the flow goes, we would have an invoice and then we would get a payment afterwards. In an unearned revenue situation, we have the unusual circumstance, the more generally unusual, not the norm for most companies is we got paid for some reason before we did the work. So what we want to do is make the payment here and record that but then tie it out to the invoice. Now when we get the payment, it should increase cash and the other side should go to unearned revenue or some kind of liability account. But typically oftentimes it's easier to track it and then link it to the invoice by putting it into accounts receivable because the receivables are the things that are going to be used in order for us to track customer information. So that's going to be our problem. So what does that problem look like? Well, we entered this deposit as a received payment item here. So we entered the deposit just like we did in this reverse order where we had the received payment before we entered the invoice. And what did that do? Well, if I go to my balance sheet, it's going to be included in the accounts receivable. However, if I go to my aging account, let's now go to another report which is the accounts receivable. And let's go into the aged receivable. And if I go down to the bottom of the aged receivable as of the end of February, we have this negative 300 here. We have this negative 300. And so that's funny because that means that the negative 300 would mean that I have a negative receivable for this one particular customer string music, which you can't have a negative receivable because that means we owe them money and that means it's a liability account. So the system does something a little bit funny when this happens, a little bit unusual from other accounting software. Instead of it, instead of us linking this and recording the other side on the accounts receivable, it basically says that I'm not going to tie this out to the accounts receivable. So in other words, the bottom line number this 10,000 303 does not match what is on on on the balance sheet, which is 11150. It's off by more than the 300 because we also had the adjusting entry related to accounts. The accounts receivable sale item that we had to so it's off by 300 and that other accounts receivable item we had the prior adjusting entry. But in any case, it's it's not included here. So they basically said in the GL side, the system saying hey, I'm not going to record that negative receivable for this customer. But I will track it in the subsidiary ledger resulting in the AR account here be different than the subsidiary ledger. Where did the other side get recorded to will they put it on the income statement. So it's in the income statement. If I go into the reports then back to the financial statements and we go into the income statement, double clicking on the income statement for the month of February, I'm going to remove the zero balances, removing the zero balances. Then in the income statement in the sales item, what we'll have that that 300 and I guess I think this is the 300 here. So so it was recorded in income, even though it was a prepayment. So this income amount is 300 in income. It shouldn't be there. It should be actually be in a liability. So that's the adjusting entry that we need to make at this point in time. We need to take the 300 out of the sales item. It needs to be removed from the sales item and it should be a liability account on the on the balance sheet, which is going to be a liability until we actually earn the money at which point in time. We will make the invoice and we'll record it here. Now, if we had we're able to just make the invoice if if in other words the guitar came and we process the invoice before the cutoff date, February 29th, it would all work out and we'd be okay at that point. But that didn't happen. We have it's crossing over the cutoff date where we haven't issued the invoice yet. That's where the problem is. So the accounting system is working fine. It's just that we have this timing difference and then and we'll have to deal with it if there's this this issue over the cutoff date where we have a deposit that got recorded in income here. So now we're going to make the adjusting entry related to it. So I'm going to take it out of income. We're going to put it into a liability unearned revenue. All right. So the long explanation. So we're going to go back over here. We're done explaining. We're doing now we're to the doing we're going to go to the tasks dropdown. We're going to go to the the general journal entry, the general journal entry going to make this large. It's going to be an adjusting entry. Therefore as of 022920 and we are going to be decreasing the sales. Now the sales is account 400. It's a credit balance account. So we'll decrease it with a debit and I'm going to put in the description a DJ entry because it's an adjusting entry 300. And then the credit is going to be going to an unearned revenue account, which I don't believe we have one yet. Most likely not. So we'll have to set one up. It's going to be another current liability. So let's just go ahead and set it up. So I'm going to say new down here. We'll make up a new account and see we're going to look for an account number that would be appropriate. Looking for an appropriate accounts number and let's see. Let's let's go with 23252325 and it's going to be called unearned revenue. You might call it customer deposit or something like that. The key here is however that it's a liability account other current liability way at the bottom other current liability account. And so I'm going to say save and close and then we'll record the $300 credit $300 credit and let's and I didn't pick the actual account. Let's make sure we have the account populated over here. It won't let me post it if I don't. I believe unearned revenue. There it is. All right. That's the completed journal entry. Journal entry has been completed. We're going to save it now and close it out here. And then we're going to go to the other side. We're going to go to the balance sheet back to the balance sheet. And now we have the unearned the unearned revenue. There's the unearned revenue of the 300. So the unearned revenue looks good as of a liability. We owe it back. You know we either owe the deposit back or we need to do the work which is to complete the sale and provide the guitar. And then the other side is going to the income statement. So if we go to the income statement it was removed from sales. So if I double click on sales we could see that we have the adjusting entry here removing this sales item. So it was posted in sales and it shouldn't have because we haven't earned the revenue yet closing this back out. Then if we go back to the balance sheet let's go back to the balance sheet and just consider the relationship between the balance sheet and the sub ledger. So notice again this unearned revenue is kind of related to our customers. It's related to our customers in some sense. So really you can think of these accounts receivable and that unearned revenue being kind of combined for the sub ledger. In other words if I took this 11150.55 minus the liability of 300 and then compare that to the sub ledger. So going back over to the sub ledger for the accounts receivable the accounts receivables aged they call it. And then I'm at the 10303 so minus the 10303.05 now we're off by only that 547 and that's the adjusting entry we made. In other words we're not off by the 300 anymore or in other words you can consider basically this balance sheet to tie into the subsidiary account if you combine the accounts receivable and that liability account. Why are we still off by that 547 because if we go into that accounts receivable account we had this adjusting entry of the 547.50. Related to an invoice that was made in March that should have been brought back to February. We're going to reverse that as of the first day of the next month as of March 1st and then that will reverse back out as well and will no longer be out of balance by that 4547.50. Okay so that's going to be it for now let's get out of here.