 Zero Accounting Software 2023, Adjusting Entry Related to Unearned Revenue or Customer Deposit. 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. Here we have a Western Digital WD Elements 20TB USB 3.0 Desktop External Hard Drive. We use it as part of our backup system, noting that if you lower the number of terabytes of storage, the price will lower dramatically as well. When you're thinking about a backup system, you're usually thinking about an online system or an external hard drive system like this, or ideally some combination between the two, giving you some redundancy. You can also work directly from an external hard drive like this, but there are some drawbacks to doing that. One being, if you use this as your primary drive you're working from, it's no longer a backup drive and you're going to need a backup system, possibly another external hard drive and or some kind of cloud backup system. And if you're working on something that takes up a lot of short-term memory, a lot of RAM as you're working on it, such as video editing, the external hard drive can slow up the system. So you might want to come up with some kind of system where you download the project you're working on to your computer, to your C drive, or possibly to a solid state drive, which is a much more expensive external hard drive as you do the work. Once the work is done, then save the project to an external hard drive such as this. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com where we have many different courses. You can purchase one at a time or have a subscription model, giving you access to all the courses, courses which are well-organized, have other resources like Excel files and PDF files to download and no commercials. Here we are in our Custom Zero homepage. 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 like we do every time. Right-click in the tab up top so we can duplicate it. Right-click in the duplicated tab so we can duplicate it again. We'll go back to the tab to the middle. Accounting drop-down. We want to open the balance sheet. This is a comparative balance sheet, but if you don't have it, you can open the standard one. Tabbing to the right. Accounting drop-down. Income statement. I'm opening a comparative income statement. If you don't have it, you can open the standard one. Back to the tab to the middle. We're doing adjusting entries. Remembering that adjusting entries are typically done as of a point in time, usually the end of the month or year for us. It's going to be the cut-off date, the end of February, February 28. There are usually at least two accounts affected. At least one balance sheet account and one income statement account is the normal layout for the adjusting entries. They're typically timing entries, although they could have some other entries we'll take a look at in future presentations that kind of deviate from that standard model. We're now looking at the unearned revenues. I'm going to scroll down. It's a liability account down here that we have recorded with the zero software, the 450. The unearned revenue, when you learn the accounting concepts and adjusting entries from an accounting book or something like that, the unearned revenue is usually one of the most confusing accounts to understand because it's going to relate to businesses that are a bit unusual oftentimes. It's not the normal course of business oftentimes. Let's take a look at our flow chart to think about how the unearned revenue might come about, what types of businesses would result with the unearned revenue, how we can track unearned revenue then in the zero software, and what kind of adjustments might we need for unearned revenue. Let's go back to our flow chart. This is from the QuickBooks desktop homepage, but we're just using it to look at the flow of the forms because it's just a nice flow chart, which works well with just about any kind of accounting cycle. We're down here on the customer side of things, the revenue cycle, the income cycle, and at the end of the cycle, we expect revenue to be going up or cash to be going up in essence for goods and services that we provided to a customer. Now, the flow of the cycle will be dependent upon what kind of industry we are in, whether we have an accrual basis or a cash basis will depend in part on what kind of industry we are in. If we're in, for example, gig work and we're just getting paid by YouTube or some other platform, we can probably be in a cash-based system and ease an easier than a cash-based system waiting until the revenue clears the bank and then recording it basically as a deposit form with the bank feeds. However, if we have a cash register situation, we're still on a cash-based system, but then we'll typically have to record the sales as they happen, put them into some kind of clearing account because we're going to have to group those sales together in a lump sum when we make the deposit in our zero system so that the deposit matches what physically goes into the bank account so that we can do a bank reconciliation. But we're still getting paid at the same point in time that we do the work or we have an accrual system like a law firm or an accounting firm where we do the work first and then we have to invoice the client and that means we're increasing accounts receivable the other side going to revenue then we have to collect on that and make the deposit. However, you can imagine situations where you get the money first, you get paid first so you receive the payment and then you do the work and you're going to invoice when you do the work and then you're going to have to match out the payment that you received in advance to the invoice. So this is kind of a problematic situation oftentimes because again the normal flow is to do the work first and then get paid usually. Now what kind of industries would this happen in? The classic example is like a newspaper or magazine type of industry because those are ones on a subscription model where you sell the subscription and you get the revenue before any work is done. Therefore, if you try to be in a cash based system with that kind of model which is also more common these days because that's basically the model for a subscription online service or something like a website or something like that. So if you try to stay in a cash based system, what will happen is you're just going to say, okay, I sold a year's subscription. I'm just going to record revenue when they pay me even though I have not yet done the work. But technically that's not quite right. That's not exactly right for an accrual based system. What you should be doing is recording it as unearned revenue when you get the money because you haven't given them the subscription yet. They might be locked into it really but it's kind of the same thing as if you prepaid your rent. If you prepaid your rent, you still really haven't incurred the rent because you haven't consumed the rent. So if you get paid on the other side, if they pay you, you haven't really earned the revenue even though you're going to do the work or provide the subscription in the future. So therefore what you want to do normally is put it on the books. This is the classical kind of book problem for an accounting textbook. We would put it on the books as unearned revenue, liability account, and then increase the cash. And then we'd have to go in here periodically and determine whether or not we have earned the revenue and when we have earned the revenue periodically, monthly for example, we decrease unearned revenue and the other side then goes to revenue as we earn it. So that's one kind of system that we might have where we have that issue. Another one, you might have concert tickets or something like that. That's another kind of thing where you're going to sell the concert tickets before you have the concert and then when the concert happens then all that revenue that you have generated should be recognized, you would think at that time. So it's just a timing difference. Another common way that this happens is with a deposit. So with rental property for example, you might collect like the last month's rent for the rental property. So you kind of have a prepayment in essence, you might call that a customer deposit. And the customer deposit, when you say customer deposit, it sounds kind of funny because you kind of feel like that should be an asset, maybe it's a deposit. But it's a liability because it's the prepayment basically of the renter or it might be a deposit that's contingent upon whether or not there's a problem with the place at the end. They always take the deposit anyways, I don't know. But it's a liability either way because you owe the deposit back until you provide the last month of use of the rental property or they've damaged the property and you keep the deposit at that point in time. And it also comes up in our case, the way we saw it come up, is we might sell expensive things like guitars and you might have someone come in and say, I want this particular guitar and we say we don't have that color or whatever of the guitar. So what we will do is we'll order it for you. But in order for us to order that weird guitar, you want that pink plaid guitar that we don't think we could sell anywhere else because it's gross, but if you want it, we'll order it for you, then we want the down payment. We have to give us the down payment to lock in and so we collect the money first and then we complete the sale process. So that's what we did here. Now let's just kind of think about that over here. Zero has a neat system for us to be able to record the unearned revenue account as a liability and it's actually better, I think, than other software like a QuickBooks Online, which doesn't have that kind of capacity as well. So we don't really need to do the same kind of adjusting entry that we have if you're looking at comparative courses that we've compared this to like a QuickBooks Online, for example, because Zero has a little technique that kind of makes it so it works out for us. So let me show you what the problem is. The problem is that the accounts receivable here, if someone gives us a down payment on the inventory that we're going to apply later, then normally you would say, okay, well then I'd have to have the received payment. I've got to record an increase to cash and the other side is going to go to unearned revenue. But usually if I record a received payment type of transaction, then it's going to record the other side to income instead of unearned revenue. So that's kind of the issue that comes up. If I record a received payment to unearned revenue, then I don't have the same tracking for unearned revenue because what I want to do in the future is turn around and send out an invoice and when I send out the invoice, I want it to be able to tie out or match out to the deposit that I've received in advance. And normally the account that kind of tracks everything by customer is the accounts receivable account. So a lot of times software will, people on the bookkeeping side will actually create a negative accounts receivable. Not a negative accounts receivable in total, but for that particular customer. In other words, if I look at the sub ledger, I'm going to duplicate a tab to the right. I'm going to duplicate the tab and we'll go into a sub ledger for accounts receivable accounting dropdown. And then I'm going to go into reports and we'll go into the payables and receivable, and I'm going to go into aged receivable summary report. So a lot of times in other software like a QuickBooks Online, one of the easiest ways to do this from a bookkeeping standpoint is for a particular customer, you put in a negative receivable because it's a credit to their receivable account. That's why you get that term, we're going to credit your account, right? To credit to the receivable account that you can then apply to an invoice. Now that's not exactly right because we don't really want a negative receivable. We want a positive liability account and zero has that cool system to be able to do that. So if I go into this, this account, let me just show you what that looks like. If I go into the asset, the balance sheet, and we're going to go down to unearn revenue, I'm going to drill down on the 450 here and let's see one of these increases. Here's a receive payment form. And so you can see here that it's got this different color to it. I'm going to say, and that's because we entered it as the prepayment. So in other words, another way we could see it, if I go back here and go back and then I go to this first tab, I'm going to hit the plus button. I'm not actually going to record it, but I'm going to go to the receive money form. And let's say we go into the checking account and then here instead of a direct payment, we said it was a prepayment. And so that prepayment will allow us to record it to the proper account and makes it like yellow like this to unearn revenue. And it gives us that sub ledger allowing us to track it by customer. So then when I go to my contacts over here and I go to all contacts, I should be able to track this information, the prepayment and the payments by customers. And that's one of the problems in other software typically because you don't have the sub ledger to be able to track it within the sub ledger here. So normally, if you're comparing this to QuickBooks online, we would have recorded a negative receivable and do an adjusting entry to increase the accounts receivable and record the proper 450 as a liability periodically so that we can have that breakout periodically but still be able to tie everything together and be able to apply out the prepayment and the future invoice in the same software and then we would do a reversing entry but zero because it has this nice feature allowed us to break out the unearned revenue without it causing any problems to us on the internal bookkeeping side of things. So we're not actually going to do the adjusting entry here. We're just going to talk it over. And then the other way you might still have to deal with unearned revenue is the classical kind of business model where you have a subscription model like the newspaper or now computer applications. If you have that kind of system, what's going to happen is your unearned revenue, you might record like all of your revenue originally to unearned revenue because all of your revenue is prepaid when you receive it. Now you might try not to do that. You might say, hey look, that's too tedious. Maybe I can get away with recording all my revenue when I receive it as revenue when I get paid even though I have a subscription model which might not be an issue for taxes if you're in the United States because for taxes they usually want you to record the IRS would like to get paid sooner anyways. So they would like you if there's prepayments and you have the money then you might be required to pay them the money that you received even if you haven't earned it. But from a cruel standpoint, it's not exactly right. So you have to kind of think about if you have a subscription model what reporting do you need to do? Do I have to do this added a cruel step or not? And if you have to do the added a cruel step what you would normally do is you have to basically record everything as a prepayment like this and then you would reduce it periodically. So then you would reduce it taking it out of the prepayment and recording the expense, I mean revenue periodically. So you would be decreasing this and recording the revenue. So and note you might be able to automate that fairly. You might be able to say okay every time I sell a year's subscription or something like that, then I'm going to put it on the books as a liability and then you might put automatic invoices or something that will automatically record the transactions periodically or monthly that will reduce the unearned revenue account and record the revenue periodically. So you might be able to kind of automate the system but whatever you do it's clearly going to be more tedious to track the unearned revenue as a liability if you have that kind of subscription model kind of system. And then again the other way this unearned revenue comes up is with this deposit kind of system where zero's capacity to do it the way we did it here works quite well because I can just record the unearned revenue as an advanced deposit. I can track that advanced deposit internally by customer and then when I make an invoice I can apply out the advanced payment to the invoice at that point in time and it doesn't mess up the internal bookkeeping and it actually properly records the breakout between the unearned revenue and the accounts receivable and the timing of the revenue. So that's the general concept with the unearned revenue so we don't really need an adjusting entry. I just want to talk out that because that's a common kind of adjusting entry that you'll see in a book problem and I just want to point out that zero does have that capacity that seems to be better than other sorts or like a QuickBooks Online to be able to track that unearned revenue and that's why we're doing it this way for the unearned revenue.