 Zero Accounting Software 2023 Adjusting Entry Related to Depreciation Get ready to become an Accountant 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 purchase and use ourselves Focusrite Scarlett solo third gen usb interface with software suite I've been using a focusrite for years for my audio needs before which time I had a usb microphone Which plugged directly into the computer But I think you'll find as I have found if you want to increase the quality of your microphone You will need an interface and the focusrite is to go to interface as far as I'm concerned I've been using this for years now. It works. Well, it's easy to use. It seems quite durably built Because I only do the screen recordings. I only need the one solo interface However, if you have multiple microphones, you need to plug in or if you have other Instruments, you need to plug in you can look at a similar model that has more input ports 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 given 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 home page 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 and then we're going to duplicate it Right click in the tab up top again. We're going to duplicate it again Back to the tab to the middle accounting drop down We want to open the balance sheet looking at a comparative balance sheet if you don't have the comparative one You can open the normal one We'll tab to the right accounting drop down this time the income statement same thing We're opening a comparative one, which if you don't have you can open the standard income statement Back to the tab to the left. We're doing adjusting entries for depreciable assets property plants and equipment fixed assets whatever you want to call them Noting adjusting entries happen as of the end of the period either month or year for us It's the end of the month of february. That's going to be our Cut off date. They typically have a balance sheet account and an income statement account related to them and don't usually have cash related to them Depreciation is a standard classic adjusting entry now if I go down to depreciation notice We have a similar concept for it as to why we need to do an adjusting entry as with the prepaid expenses Like prepaid insurance which we did in a prior presentation However, there's an added twist when we go into the fixed assets because we have this other account We deal with accumulated depreciation And we usually record depreciation expense not like fixed asset expense or equipment expense. So first Why do we do it? Why do we have to record this a cruel kind of concept? Why can't I just expense the depreciable assets when I purchase them? And you might first think that it's because maybe you financed the equipment Maybe you bought a building and you financed it with a loan and therefore you couldn't expense it on a cashed based system But no that's not the reason Whether we financed it or not We would still want to put it on the books as an asset and depreciate it In the same fashion no matter how you know how we paid for it through financing or not And the reason is of course if we go to the if I go to the income statement and I put a 100 thousand dollar Building that I purchased in january and compared it to february Then it would look like january was a very bad month because we would have an extremely large loss In comparison to february. So the comparison is wrong. We want to have a matching principle So that we can have comparative performance months. Therefore, we put it on the books as an asset Even if you're in a cashed based system By the way, even if you're trying to be a cashed based system in the united states for income tax reporting purposes You will still be forced by the tax code to put it on the books as an asset Because it's such an extreme Deviation from the ideal of basically an accrual based method which an accountant would think is more of the ideal way to be reporting and The cashed based method which is often easier Which is why oftentimes We try to go with a cash based method if there's not a big, you know difference between the two But there is a big difference. That's why we have to put it on the books as an asset So then once it's on the books as an asset We're going to expense it periodically at the end of the month or the year in a similar fashion We did with the prepayments like prepaid insurance. However We have an an added twist here and that is that we usually make another account For the decrease So now we have what we call a contra asset account An account that's an asset, but it actually decreases the assets to contra asset bringing the asset balance down Why do we do that? Why don't I just decrease the furniture and fixture directly as we did with the prepaid insurance because the idea is That we are consuming a part of the furniture and fixture And we want to allocate it to the income statement in the same period We consumed it in a similar fashion as we did with the prepaid insurance And one reason is because it's an estimate. It's just an estimate the furniture and fixture didn't go away We can't see it like being removed exactly We're just estimating and allocating the cost of the fixed assets over what we estimate to be its useful life So one way we can determine and show that it is an estimate is by making another account and say hey Look, this is what we purchased it for 98,000 and this is what we are depreciating or have depreciated to the year to date as of this point in time This is the book value Which if we did an ideal process would match the fair market value However, it's not going to because it's just an estimate and then the other side will be called depreciation expense on the income statement Now there is debate oftentimes as to whether or not we should record fixed assets on a fair market value versus A depreciated asset and and it's still you know, you can go on either side of that kind of argument Note that when you have something like investments up top like investments in stocks There's a more legitimate argument to say I should record the investment in stocks at fair market value instead of at cost or adjusted cost and the reason there is because If your stock is traded on the public stock exchange Then you know how much the stock is worth at any given time Because other stocks which are exactly the same are trading at that same point in time Whereas a building for example Although it might go up in value instead of down in value, which is what we're doing when we allocate the depreciation We don't we haven't really locked that in for number one because we haven't sold it and number number two We don't really know what happened to any particular building because it's unique in nature So we can't really we can't really depend on the market We have to do estimates and once you once you let in estimates Then of course there's pressure for people to manipulate whatever the estimates are on the property and whatnot So those are kind of arguments on why you might have a depreciated cost versus a fair market value Kind of system now in the united states We also have to deal with with this accumulated depreciation for income tax reporting So that means that we're going to have a separate schedule for depreciation based on tax depreciation and tax depreciation Is quite different than what you would do for normal depreciation oftentimes because they often put in accelerated depreciation and whatnot To try to manipulate or stimulate or whatever they want to call the economy So that means that the sub ledger For furniture and fixture is often not worthwhile to kind of track Within the accounting system in this case within zero Because you're going to have to track it again anyways In the tax software in order to get the tax depreciation And the tax software once you have all the data in there you might as well use it to also calculate book depreciation So in the united states we have this question of Do I want to keep my books on just tax depreciation? Which might be easiest for small companies or do I want to have a depreciation for book that is different from taxes? Which means that i'm going to have to run two different depreciation schedules using hopefully the same tax software And and then get the information from the tax software as the sub ledger in order to do my adjusting entry here So in other words we're net we don't have a sub ledger in zero oftentimes If that's the method we are using as we do when we're looking at a perpetual inventory system with inventory Or accounts receivable when we look at the report by customer It's similar to the inventory system where we have another sub ledger if you were tracking inventory outside of zero And doing a periodic inventory system. That's kind of what we're doing here with the fixed assets We have a ledger that's going to be in the tax software That we're going to use to do the calculations now. Here's just an example of what one might look like and So that means also on the on the zero side of things What you like to do is is put everything into zero in such a way that the categories will be the same as whatever Your sub ledger will be which means you want to talk to your tax professional If you're in the united states And see what does one of the accounts for the sub ledgers because they they break out here to furniture and fixture And machinery and equipment. So that's why When I enter my information in here, we put the fixed assets in in the grouping of furniture and fixtures And then equipment instead of choosing like furniture and equipment or something like that you could do that But that's going to make things more complicated You would like to have it tie into the sub ledger And then you have an option also Of in your bookkeeping breaking out a relative Depreciation account which ties out to each category of fixed assets, which we did here We don't see one here because we haven't reported anything to it yet Or you can have one account for Accumulated appreciation which ties out to all of your fixed assets I tend to like to match whatever is on The the sub ledger So i'm going to i'm going to break out my accumulated depreciation And the same grouping and have a separate accumulation Cumulated depreciation account per grouping in our case furniture and fixture and the machinery and equipment Now the the next thing to note is that this report is quite complex There's a lot of detail to it and you've got to you've got to have different reporting for each of these Uh items so you might say that's quite overwhelming to do However, it's not really that bad as long as you do it properly as you go Because all the stuff that's that's goes in here from prior periods Is is not going to change when you buy a building the building will just stay there For multiple years Therefore you don't really have to do anything if you get the building on the books properly to start off with because then It'll just calculate the depreciation going forward And all you have to do when you adjust things going from zero to the sub ledger Is to get the detail the things that you added to property planting equipment And the things that you removed from property planting equipment and there shouldn't be too many of those things Because we don't record things to property and plants and equipment all that often Right. We only we only record some things During the year now when you give this information to the accountant To put into the sub ledger or when you're putting it into the sub ledger What you do not want to do Is group everything together like if I grouped all this stuff together As just one lump sum because I bought it from the same place and I just called it furniture and fixture That will be a problem not when I put it on the books But when I take it off the books if I sell one thing Like my coffee table or whatever Then I won't be able to easily sell it In accordance with the depreciation schedule because I grouped them all together So so you want to make sure and you also want to make sure that you can find the coffee table So any kind of reference numbers That you can put into your sub ledger Which will allow you to identify the actual piece of furniture and fixture In the future when you sell or dispose of it so that you can properly dispose of it on your sub ledger becomes important and again It's one of those things that you want to build right you want to The the adage is major twice cut once get it right the first time Don't try to tinker with it And until you get it right you got to get it right the first time because that's going to save you trouble in the future When you start to get this long Schedule and you're trying to identify what stuff you still have and what stuff has been removed All right That's that is that now also note that zero has this really neat edit layout tab over here Which allows us to group Our our fixed assets so you can see that's what one of the things we did with our adjusted trial balance is We put our fixed assets and we grouped our fixed assets Uh into these groups, which is really cool flexible thing that zero has More far more flexibility with that tool than other software Like quickbooks online, which has a a sub account kind of method, which isn't quite as flexible as that all right So now we're just going to do our entries according to our sub ledger You might get the sub ledger like at the end of the year because if you're doing it from taxes It's going to record it on a yearly basis and I could then you know try to estimate it for A month by just dividing it by 12 for example Uh, and again, you might you might have a tax based one as well as a book based one if you're working with tax software Okay, so i'm going to take this so this is the the furniture and fixture for the year 14 14 001 i'm going to divide it by 12 that would be 1166 75 would be the depreciation For one month i'm going to say two months have passed because i'm doing january and february So i'm going to record depreciation for the two month time period a total of two three three three Now i could record two adjusting entries one for january one for february But i'm just going to try to make my financial statements correct as of the end of february And so i'm saying this is depreciation for the end of february All right, let's finally do the journal entry. So this is going to be A debit to depreciation expense and a credit to accumulated depreciation. Let's go to the first tab Go to our journal entry accounting drop down reports And we want to find the uh journal report again The journal report And we will go into add Uh an item this is going to be an adjusting entry The date is always the end of the period feb 28 in our case Feb 28 is the date. We're not going to do a reversing entry Uh, this is a permanent difference not a temporary difference no reversing entry involved And then the account i'm looking for depreciation So we have a depreciation account. This is another option that you kind of that you have here you you could Have a separate depreciation account per category such as furniture and fixture and machinery and equipment. I usually uh Don't do that if i unless i really want that added detail because Uh, so i just put it i'm just going to put both the depreciation into one depreciation account The reason i break it out on the balance sheet, but not the income statement in other words On the on the balance sheet half i'm going to break out furniture and fixture and equipment But on the income statement i'm just going to record it to one depreciation account. Why? Because on the income statement, it's a temporary account. It's going to roll into The equity whereas on the balance sheet It's a permanent account and i kind of like the added detail of being able to show the book value For each category. So that's but you might do a different method. That's what i do So the amount's going to be two three three three point five And the other side is going to be accumulated depreciation Uh accumulated depreciation for the equipment. So we've added that already That looks good and that's it. So let's go ahead and save that one and then we'll do the next bit posting it balance sheet update the balance sheet And I got a hiccup Don't give me the hiccups. I'm working here That's going to mess me up man. I'm not stopping Here we go we've got Uh the adjusting entry that happened for the for the furniture and equipment. Where did it go? I put it into the equipment. I messed it up. Let me go back into this one I picked the wrong account. Sorry about that Sorry about that Here we go. We're going to go in And fix it. I'll fix it. Don't worry I can fix it. We're going to hit the drop down and edit this thing And we want the accumulator the other accumulated depreciation account For the furniture and fixtures. All right, that should do it post it I'm going to open the balance sheet backup accounting drop down balance sheet comparative report And now let's check it out and it should be correct this time scrolling down down down So there it is. So now we have the 98000 minus the 9833 so we increased the contra asset account Which decreased the book value to the 8816650 So there we have that and so now this ties out to what we paid for it And then this is this and then over here we have the current year to date is going to be 14001 Too many zeros divided by 12 times 2 Plus the prior year depreciation of the 75 Is the 983350 98 3350 book value 8816650 Okay, so then and then on the income statement We just recorded everything just to depreciation expense Boom depreciation expense lowering net income even though cash isn't impacted. So that's usually oftentimes a big Uh entry notice what's happening with our adjusting entries. We had Uh, we're we're hit. We're going into a big loss here in in february We're still positive on the year But that's often what happens with the adjusting entries, especially we later to depreciation Because it's recording and expense All right, so then we're going to say let's do the next one Let's pull this thing up And this is where's my calculator calculator 833 is the depreciation on the year. So I'm going to say 833 divided by 12 times 2 We want 138. Did I do that right 833 divided by 12 times 2? Of course I did it right What are you doubting you doubting my capabilities? I know how to use the calculator Uh, this is going to go Let's close this out and do a new journal New journal. I'm just going to call it's a dj entry Date 228 the date is 228. That's the cutoff date Things have been cut off after that time You want to don't put your foot over the line or you get your foot cut right off because that's the cutoff point So this is going to be depreciations the debit And 138 He's got his foot in the in the door Better get that foot out of the doors to cut off. This is the cutoff date This is going to be a cc depreciation a cc depreciation for the equipment now There it is. There's the debit. There's the credit I think everything is correct this time. Did I do it right? I picked the right one. Let's post it And then we'll check it out the balance sheet update The date is up the update is a down date The update is down because then it fit So here it is, uh It put notice it put the accumulated depreciation on top But notice how cool the layout is over here. I can say I could just fix that I can go into my edit layout Say that's not how it should be you're trying to do alphabetical order, but I'm going to fix it and I'm going to put uh Where where where is it my equipment Accumulated I'm going to put the the Equipment on top like it should be can't really do that very easily on other software like uh quickbooks online for example So super cool super cool. You have other techniques you can do in a quickbooks online, but the flexibility the flexibility man i'm saving that because that was a important change important update that we want to keep in place going forward So there we have it. We've got the 5000 minus the accumulated depreciation brings us to the book value for eight six one 17 if I go over here and just double check that we've got the The eight three three divided by 12 times two. That's for the two months of this year plus the prior year depreciation of zero so 138 that's what it should be 138 and so the book value For eight so notice how nice this is it can have how much detail it gives us We're like, yeah, we purchased the furniture and equipment for 98,000 But then we've depreciated thus far allocating the cost of nine eight three three over the youth's life not just this couple months to 88 166 50 and We have the equipment here 5000 Minus the 138.83 the book value is this and if I add the two book values together We've got that plus eight eight one six six point five See how much detail we give there now if you don't want to give that much detail again The the flexibility here of the report If I go into here allows us to say I don't want to do that man. I just want to show Like the the book value so I can just collapse these And just say just do that just show me the book value. That's all I want to see And because of the flexibility in the way we have structured this and zero's capacity We have then now we've just got we've just got the collapsing the book value of these two and if I don't even Want to see that I'm just like I just want to see The fixed asset I don't want to see any of that Other stuff We can go into here and just collapse and just say just show me The fixed assets like that now I'm not going to save these changes Because I like the detail But just note that that those are ways that you can summarize your report down here And now you've just got that line item for the fixed assets So a lot of flexibility kind of like a like a gymnast inflex Because because gymnasts are flexible And if I go down so there's the depreciation And here's our net income thus far. All right. Let's open up the trial balance and see where we stand at this point the trusty trial balance We'll go to the reports Type in not trusty just trial balance even though the trial balance is trusty trustworthy trial balance And we're going to say We're going to say custom date And We're 2020 I'll just say the end of the year. So we'll pick up our reverse in entries, too This is where we stand Uh, if you were correct last time if your trial balance was in balance But now you're off the things we changed, of course We're the accumulated depreciation for furniture and fixture accumulated depreciation for the equipment and The one depreciation account that we've recorded down below Which we accounted for both of those depreciate depreciable asset types in