 QuickBooks Desktop 2023. Adjusting entry, prepaid insurance. Let's do it with Intuit QuickBooks Desktop 2023. Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Here we are in QuickBooks Desktop. Get great guitars, practice file. We started up in a prior presentation going through the set of process we do every time. Maximize the homepage to the gray area in the view drop down. We got the hide icon bar, the open windows list checked off open windows open on the left. Reports drop down company and financial. Let's open up that P to the L the profit to the loss the income statement from 010123 to 022823. That being the cut off date, which I didn't type right 022823. There it is. Then the report the drop down. I'm going to bring this to a month by month comparison. So then let's customize it so we can see it better on the fonts, the numbers to change it to go to 14. Oh, yes. Okay, then reports drop down again company financial this time the balance sheet standard. And let's customize it first and then do the range to the change 010123 to 022823. Let's bring that to the months instead of the total font in numbering changing 14. Oh, yeah. Okay, there's the setup process that we do every time. We're going to be doing adjusting entries related to prepaid insurance, which we can see here on the books as an asset as of this point. Now note prepaid insurance is one of those kind of items where if you're a smaller company and you're on a cash based system, you might try to do it more on a cash based system rather than a cruel system. Kind of depend on your circumstances. But let's just think about the rationale then and when you might use it like an accrual system versus a cash based system. So for example, it's similar to the concept being like the depreciable assets, the property planting equipment with the property planting equipment. It's pretty much unavoidable because even if you're a small business on a cash based system, the tax code in the United States will still force you to put large pieces of equipment on the books as an asset, which is an accrual concept and then depreciate them due to the size of the discrepancy. And what I mean by the size of the discrepancy note that if you go to the profit and loss report, this is supposed to be the report that measures performance. If you were to buy a giant building and then expense $100,000 building in January and then try to compare January's performance to February, January would look quite bad due to the fact that you have this giant expense. But that's not really fair because the expense should be allocated over like 30 years, right? Not in just one month of January. Therefore, we have to put it on the books as an asset and then depreciate it. So that's so extreme that we have to do it that way. Now, if you look at like a prepaid insurance, which is the primary example of basically every other kind of prepaid thing then. And the reason that is just because of the nature of of insurance. So insurance is something that's a little bit abstract because we don't actually get something from the insurance company unless something bad happens. If you buy liability insurance, then they don't actually pay out unless you get sued or something, right? Which you don't want to happen. But you are actually getting something after you pay for the insurance, you're getting coverage. You're having security of mind. You have the lowering of the risk that is happening. But the coverage can't happen until after you prepay the insurance. That's different than every other kind of expense where you usually pay after you have incurred the expense like the utility bill, the phone bill. You use the phone and then the water and the gas and whatnot. And then they charge you with insurance. They charge you and then you get the protection in the future. Therefore, it's prepaid by its nature. Now, if it's a small amount of insurance and or if you're on a cash based system, then possibly you could and or if you're paying on a monthly basis, then you might still be able to basically expense it because it's either in material or you're paying it monthly. So it's still pretty close to the point in time that your coverage was covered. But oftentimes you pay insurance like every six months or in a year in advance in order to lower the insurance premiums. So in that case, it starts to get fairly large. And if you look at a month by month comparison and you had a full month that you expensed and then the following month didn't have any of it. It would get a little bit off and you have to think about what your tax requirements are as well if you're doing this stuff for tax purposes. So I just realized that when you're thinking about the insurance with regards to the ease on the bookkeeping side of the data input. So if I go back to the home page when we're just entering our bills and the insurance bill comes up, the easiest thing we'd like to be able to do oftentimes is to try to automate everything. Is there some way that I can basically have bank feeds maybe pay the insurance electronically and have the bank feeds pay them? It's possible. But then the question is, no matter how you process the payments, you have to think, do I want the account going to a prepaid account, an asset account? Or do I want it to go to an expense account? Now the easiest thing usually if you're on a cash basis is to expense something. If you have an option, can I just expense it or do I have to do some accrual thing? Usually, I mean, if you could just expense it, that would be the easiest thing to do because there's less steps. You just expense it. But if you have to put it on the books as an asset, then you're going to set up your accounting process, however it is, if it's bank feeds or whatever. Usually to put it on the books as an asset and then expense it periodically, whether that be monthly or at the end of the year. That expensing of it periodically is the added step that you have to put in place, which makes it more difficult than just expensing it upfront or at the start. So if you're working with an accounting department, if you have a bookkeeper and you're working with an accounting department, or if you are the bookkeeper and the accounting department and you do adjusting entries at the end of the period, you have to think, how do I want to set this up? Do I want to just expense everything as it goes? Even if you expense everything, it's possible at the end of the period to do an adjusting entry if they need to for taxes or reporting purposes, lowering the expense and putting the prepayment on. The reason you don't really like to do it that way is because it's a little bit more difficult because the profit and loss are temporary accounts that roll into equity. So when you're trying to figure out how much should be expense, it gets a little confusing if you have cut off dates that go over the end of the year. Whereas on the balance sheet, these are permanent accounts. So they're not going to roll over or change until you actually make a change to them with a transaction. So the easiest thing to do then is what we did here, put it on the books as an asset when you pay for it and then periodically at the end of the month or the end of the year, make the adjusting entry, expensing the portion that has been consumed. Okay, so how would you do that? Now, we're going to just make an assumption here that basically we bought a year's worth of insurance like at the end of January and it kicked in in February, we're going to say. And so we have 12 months, including February into the future for this $12,000 that we paid for the insurance. So that means how much has been consumed thus far, it's going to be, so we're imagining that if we looked at the insurance policy, the policy would say it's going to be running from February 1st to a year from February 1st, right? So that means that one month has expired of the $12,000. We paid $12,000 for it, lowering cash, increasing the asset. And now we're going to expense the part of the asset that we actually consumed. It's on the books as an asset up here because we're not going to get cash for it. We're going to get coverage in the future. That's why it's an asset. We haven't yet consumed it yet. So we're going to say, well, if 12,000 divided by 12, of course, that means it's going to be 1,000. We're going to say our expense as of the cutoff. Now note, we didn't do any adjusting entries for January. And remember that you have to decide when you're going to do adjusting entries. Small companies might not need to do adjusting entries every month because they might not be doing external reporting monthly. You might need to do adjusting entries when you have financial statements for a bank or something like that. Or you might need adjusting entries also like on a yearly basis. We're going to be doing the adjusting entries as of the cutoff period of February here. And we're going to say as of February, as of the year to date February, there's only been $1,000 of the 12,000 that has been consumed. Okay. Now we could enter these with a journal entry, make a journal entry. But because there's only two accounts affected, we can also use the registers and just decrease this by 1,000, put the other side to an expense. Let's do that. And then we'll also look at the journal entries, list chart of accounts. So there's two accounts affected. I can't use insurance expense because that's an income statement account. I can't use a register for an income statement account. So I got to go to the prepaid insurance, double click on it. And I'm going to say as of 022823, that's the cutoff date. We're going to say there's a decrease of 1,000. And then the other side is going to go to insurance expense. Is that insurance? Sometimes I put it to internet expense one time and people got all, I heard about it like a lot. That's internet expense. You messed it up and I was just, so I don't want to do that again. Anyways, this is an adjusting entry, adjusting entry. So there we have it. We might want to put more detail on the adjusting entry saying here's the calculation or whatnot for it. But I'm just going to at the least put that it is an adjusting entry. That brings it down to the 11,000. Let's close this out. Check it out. We can also see the journal entry if I double click here. Journal entry. Boom. Stop showing me the thing automatically. I know you do that. That's good. Quick book. Stop trying to show off. I know you're working hard. So let's save that. So there's the credit to prepaid insurance. The other side is going into insurance expense. Save it. Close on that. Close on this. Close on that. And then here. Now we decreased it to the 11,000. Now that makes sense because how much of an asset is left as of the end of February? Well, if we had 12,000 and we divide it by 12 because it's 12 months, we get 1000 per month. 11 months have not expired. We are saying so times 11 would give us the 11,000. One month had expired. So if I bring that on over to the profit and loss, the 1000 is here. The 11,000 is here in February. Now you might say, well, what about January? I mean, you could say, well, you entered that as of the end of February. And I'm imagining here we didn't have the coverage in January. But even at the end of February, you could say, well, some of it should have been there as of February 1st, February 2nd, February 3rd, right? You put it in there as of February 30th. That means if I run an income statement for the middle of February, I don't have the proper amount allocated as of 15 days of February. And again, that's correct on an accrual basis. It's not perfect because if we were trying to make it perfect in that way every day, then that would be way too tedious. So what we have to do is say, OK, I know it's imperfect in the middle of the month. And it's going to be as close as we can get it as best we can do for reporting purposes. As of the financial statement reporting period, the end of the month and or the end of the year is the general idea. So there's the thousand on this side. If I double-click on it, of course, that takes us to a journal entry. Double-clicking on that. There's our register. Double-clicking on the register takes us to the debits, to the credits. Closing it back up, closing it back up, closing it back up. There is that. Let's take a look at the transaction of the journal reports just to look at it there because that's fun. Let's go to the journal report. And then why is it showing me this to stop doing that? QuickBooks, I saw it last time. I'm going to bring this from 022823, 022823. And then let's customize it. Let's just look at the journals. So I'm going to go to filtering and let's just look at the transactions and what I need journals, journals, transactions, numbers. Let's bring it up to not 14 this time. That was too much last. I remember that was too, too much. So I still, even at 12, so I have to do this to make it all work out. But that's okay. Boom. So there's what we have thus far for our adjusting journal entries. And then we have the reversing entries. Notice that this one doesn't have a reversing entry. Why? Because this is a permanent difference. It's not something that reverses out. It's not just a timing difference. So those things can be a little bit confusing. Like which ones do you have to reverse and which ones do you not? You got to think, well, is it a timing difference or is it a permanent difference? And the best way to understand that is just to keep practicing these adjusting entries and get a feel for what kind of transaction this is. Meaning in this case we had to expense, the expense isn't reversing, right? We had to expense it and that's the way it's going to be going forward. And in the following month we're going to expense another 1,000 as an adjusting entry and so on and so forth. Okay. Let's go to our reports dropdown. Let's go to the trial balance. The trustee TB will run this as of 02 to 02. Now let's go from 01, 02, 03 to 02, 28, 23. That being the cut off date. Customizing it. Fonts to the numbers. Changing the font to 16. Let's say O-Y-K. That's what we've got to say. O-Y-K. O-K-Y. And so this is what we have as of the cut off. Let's also bring it up to the following month so we get our reversing entries. Let's make that 03, 31, 2, 3. Boom. And this is as of the following month which should include the reversals. Because I was inverted with the reversals there. So that's where we stand as of this point in time. We'll run some more of those transaction detail reports at the end of the adjusting entry process.