 Zero Accounting Software 2023. Reversing entry accrued interest. 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 were 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 20 terabyte USB 3.0 desktop external hard drive. We use 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 given you some redundancy. 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If you don't have that you can open the normal one. Back to the tab to the left. We're continuing on with our adjusting entries. This time a reversing entry for the cutoff period. Meaning we want everything to be correct as of February 28th in our case because that's the cutoff date. And then we're thinking after that date is it necessary for us to do a reversing entry? In this case we're gonna say yes, we're gonna do a reversing entry. So let's review what we did last time and think about why we might need reversing entries. Not every adjusting entry will need a reversing entry. It's only when you have those timing differences that you'll need to do the reversing entries. So last time we were taking a look at our liability account down here for the $5,000 loan payable. We know there's a couple just adjusting entries you might need to do with regards to loan payables. One is with the accrued interest. That's what we did last time. We'll deal with breaking out the short-term and long-term portion of the loan in a future presentation. To figure the amount of interest we came over to our worksheet to do, well the journal entry by the way was an increase in the interest payable, interest that we basically, oh we've incurred but we're not gonna pay until the next payment that happens which is happening sometime in March. If we go to the income statement then we recorded in interest expense and expense for the $15 that we have not yet paid but have incurred because it's kind of like the rent on the purchasing power of the money. So if you rented office space for example, even if you didn't yet pay the rent if you use the office space on an accrual basis you would record the expense. Similar with the interest expense we used the purchasing power of the money and therefore we incurred the expense. Now the transaction we made our report over here or amortization table and we looked at the fact that the next payment according to our amortization table was 1,764.82 gonna be paid in March but it's for 30 days and 15 of those days happened before the cutoff date. So when we look at that journal entry normally the journal entry would be according to the amortization table here. This would be the normal journal entry if we didn't interfere with our adjusting entry then the normal journal entry would be interest expense, debit for the 1,4583 on the income statement. The loan would go down by the loan reduction 1,899 to the loan balance would then result in being at the 3,381.01 and the cash that would be decreased is the 1,764.82 on the payment. That is what we would normally record. Now remember if you're the other thing I just want to point out is if we're trying to make the recording as easily as possible in zero the breakout between interest and principle makes that difficult to do. So for example, you can see the payment is the same. If you make these electronic payments within zero that way you're gonna say, hey it's gonna come through the bank feeds and I can just record the bank feeds as an expense when they come through the bank feeds but you have a problem and that is that there's two accounts affected not just one. That's usually not too much of a problem because you might be able to work that into the bank feeds but you also have the issue that these two accounts over here are gonna change with each payment. They're not always gonna be the same breakout even though the payment amount will be the same. So you can't really automate the system within zero on the bank feeds. So another method that you could use is you could say, hey look what I'm going to do is I'm just gonna record the full amount 1,764 to the loan account which will not account for the interest and then periodically at the end of the month or year I'm gonna take the amortization schedule and properly adjust the loan amount to the amount on the amortization schedule and record the interest related to the period. That way the zero entries can be entered with just a simple bank feeds that you can memorize transactions and basically automate the process and then do the adjusting entry periodically possibly at the end of the year if you're just doing the reporting for tax purposes. So that could be the most easy automated thing to do. However, the second easiest thing to do is you're gonna have to make these payments according to the amortization schedule. That's what we're gonna imagine we are doing here. This would be the journal entry that you'd have to do for that first payment. But we already did this up top because we needed to pull half of that expense into an expense before the cutoff date before 228. So that would mean when this journal entry happens they would have to alter the journal entry, right? So they'd have to say, okay, well you already have recorded half of the interest last time. So the journal entry, they'd have to do something like this, right? It would have to be interest expense would have to be equal to the 145 minus the amount that we've recorded last time, this amount and then we would have the loan payable or the interest payable was increased. And last time, so it would have to go back down with a debit. And so that would be the interest, there'd be like this debit. And then I'd have to record the loan which would still be the same of this amount. And then the cash would be the negative sum of that. So same kind of journal entry except I'd have to break out the interest expense and reduce the payable account to make up for that 145.83. But this is a tedious transaction. You don't want the bookkeeper to have to do that. You don't want the bookkeeper to have to change things up. The other thing you could do is just say, hey look just record it according to your normal transaction here and just leave that loan interest payable on the books and then we'll deal with it when it comes around again next time and we'll just make an adjusting entry so we don't have to reverse it in that case as well. But we're gonna reverse it here. We're gonna say, hey look let's reverse it so this doesn't mess up the accountant. We put it on the books and we're gonna reverse it as of the first day of the next time period so that the accountant can just record this transaction the way they would normally do it. All right, so if I go back on over here and we could say let's go into the transaction we did last time, I'm gonna go to the first tab here and I'm gonna go into that journal entry by going to the accounting and open up the balance sheet report and I'm gonna drill down on it so that we can see the actual journal entry that we put in place. So I'm gonna enter here and then I'm gonna go into the interest payable which is a liability down here. Where did I put it? Done day, there it is. So there's the interest payable. I'm gonna drill down on it to the source document which is of course a journal entry type of form. And so then we can go into the journal entry. Let's drill down onto the journal entry. And so here's the journal entry. Now if I wanted to adjust this I can hit the drop down up top and say that we wanna repeat reverse edit. I'm gonna edit the transaction. And I wanna point out that normally when we did the adjusting entry they have this reversing tab. Now it's a disappear, they don't have it anymore. But there's a reversing tab when you first enter the journal entry. And so you could automatically reverse it when you put the entry in if it's a reversing entry, which is pretty neat. The other thing I wanna point out here is that you might actually wanna look at this transaction to see the debits and credits so that you can reverse it exactly. Now note, when you reverse the transactions sometimes people get a little bit mixed up on what the best way is to reverse it. And let me just show you what I mean. If I go over here and notice that by natural naturally for debits and credits I usually put the debit on top. That's what you're supposed to do. That's like the normal process. But if it's easier to see by putting the credit on top then my recommendation is that's what you should do. So I'm gonna format this by going to the home tab format and make a skinny M. And let's just do the same transaction. We could say this is gonna be the same here, debit, credit. Let's format this black and white and center at home tab, font or alignment, center, font, black, white. Let's center it, alignment, center. And then what I'm gonna do instead of reversing it instead of saying I'm gonna put the debit on top like this or whatever and then like this. That's still, that's not too difficult to see that way because there's only two accounts affected but it's still a little bit jarring because usually we read from top to bottom, right? And if I'm trying to compare these two the easiest thing to do in the reversing entry is just to stay the same from top to bottom and then just reverse the debits and credits like that. And so that's to me a whole lot easier to read than trying to re-organize the number of the accounts. So that's what I'm gonna do. So, and so when I do the reversing entry that's what I'll do over here. Let's do another manual. Let's go into the manual journal which you can go here or you can go to the account drop-down and reports and then we're gonna say this is gonna be the journal report and then we're gonna enter a manual journal with some manual labor right here. Make sure you're warmed up. You've worked out your muscles so that you can, this is gonna be a reversing one and one to get strained and then sue me because they pulled their muscle on their keyboard muscles. Let's go back on over to, this is gonna be as of all reversing entries are the day after the cutoff. So the cutoff for us is 228. All reversing entries are on March 1st. Now again, this confuses people a lot of the time so I'm just gonna point out that you're gonna say, look, the payment doesn't happen until March 15th so it would be more correct. You could be correct for 15 more days or closer to correct if you don't reverse it until March 15th because that's when, but we're not trying to be correct for every point in time. We're trying to be as correct as we can as of the cutoff date and then on the reversing side, I don't want the reversing side hanging out in the middle of the next period because then it's harder to locate and it confuses people. So we wanna reverse everything as of the same date, the first date after the cutoff so we can easily see one day being the cutoff entries and the next day being the reversing entries, sacrificing and being okay to sacrifice while doing that, the fact that we're not making everything perfect for the middle of the time period in our case, the month. Now notice, here's that reversing entry. So when I entered the adjusting entry, I could have just hit the dropdown and say reverse it and it would do this reversal for us, which is cool but hard to see and that's why we're doing it manually here so we can see exactly why we would do the reversing entry. So the accounts that are gonna be affected, we're gonna be debiting, we're just reversing this one, so interest expense. So I'm gonna say interest, this is gonna be a credit now, interest expense is gonna be a credit. So we put in the credit on top and you're gonna say, but that bothers me, that bothers me, but that's okay to get over it because it's easier to do it that way. But my supervisor doesn't like it that okay, then do what the supervisor wants, otherwise they might destroy you or something. But otherwise I think it's an easier process. And then we've got the interest payable here, the loan, and this is gonna be a debit. So interest expense, credit, interest payable, debit, reversing entry, let's post it and then check it out. Make sure it's on March 1st, February, January, February, March, okay. Just making, I had to say the months to make sure that that's the one after February. Sometimes I get them mixed up even though I do this every day. For crying out loud, you get mixed up, but I mean, okay. So we're gonna go down and then we can see the side by side for February. We can actually, I'm thinking if I wanna add a column, let's add a column to our layout over here because that would be neat and I'm gonna add a column for the date of March. Let's add another column for March out here. Poor K-No, why not, you know, why not? So there it is, we added March. Let's update the layout and I'm gonna go ahead and save that. So let's just save the customization as that same report. So I think that should save it, all right, cool. Okay, so now what was I doing? If I go down then we can see now we've got the interest payable, we put it on the books at 72 and then I took it off the books and I messed up by $3.00, did I not put the right dollar amount in? Let me fix it. This is how you go in and fix it if you mess it up. This is the reversing entry. Let's drill down on the reversing entry and let's edit that. And put the proper dollar amount in, which is 72.92. 72.92, I don't even know what you did there. How did you do that? It's not even a dyslexified thing. You just did something, it's just like a whatever, like whatever, dude. That's why we have the double entry accounting system so we can check the thing, you entered it right. So let's go back down to the balance sheet again and check it out. And then we'll scroll down and we can see now that we have the interest we put on the books and then we took it off the books. So now we took it off the books for the first day after. So if I go into the detail and we check out the detail here, drill it down to the source docs. This is going January through March, perfect. So we put it on the books with a credit and then we took it off on the first day after, even though the payment isn't actually happening until the middle of March. And then when the payment happens in the middle of the March, it'll look like this. They can just do the normal journal entry and not have to deal with the fact that that payable is on the books because if I look at the balance sheet now, the books look like what the bookkeeper, if we think of the bookkeeper as being separate than the adjusting department is doing, right? The bookkeeper is saying, okay, I don't have any interest payable messing me up, whatever. And so if I go to the tab to the right and update it here, let's add another column for February again because that's cool to do. I'm gonna edit this thing and add another column, another column, date column, and this is gonna be March. I mean, we already have February, this is March. Adding March and let's customize that and let's save the customization. So we have it there next time as well. All right, so now we can say that we have interest down here. So we had interest recorded and then we reversed it. Now, this should look kind of funny here because this is actually an increase. This is increasing net income. And it should be, it's down here, it's not an expense. It's kind of flipped because this is the other income and expense area. So this is actually looking, it's acting like revenue and it's an expense. So that shouldn't be the case. That will look funny. And notice the accountant, if you do this, the accounting department will say that, what did you do? There's something that looks funny there because now I've got this thing hanging out there. But if they record the normal transaction as of April, April, it will be correct. Meaning for example, once we hit this point where they're gonna record this transaction, what are they gonna record? They're gonna record a debit to interest expense of 145.83. When they do that, it will net out against this amount to give us the proper amount recorded in the second month, which is 72.92. So it will then properly break out and between the two periods, if we use this method without having to change the method of what the accounting department is doing when they record the transactions. But you have to kind of understand that so that when people ask you, why is that there? Then you can kind of explain, well, that's the adjusting entry. It's gonna make sense after you do the entry at the end of, or when the next payment is due March 15th in this case. So now you can see what happened is we recorded the manual entry that put it on the books. We can't see the manual entry because this is just March. Let's bring this back to FEB, FEB, we could do just FEB 28. So then we can see, we put it on the books before the cutoff date. So now we recorded the proper interest expense and then we reversed it after the cutoff date so that we can make the financial statements as of FEB 28, the cutoff date. And then after we reversed it, which results in if we run a report just for March, something that's not quite right, right? 72, you're showing like a negative expense account as of just the month of March. But it will be correct when they record their normal journal entry, in this case, in the middle of the month on March 15th and they record the full amount of the interest expense, 145.83 because it'll net out to half of it being recorded in March, right? That's the idea of it. Okay, that's what the reversing entries do. They're an attempt not to mess up the bookkeeping department so that you can do your adjusting entries and tweak everything to be perfect as of the cutoff date for financial reporting purposes, either for external reporting or for taxes and still not mess up the bookkeeper as they move forward with their internal reporting purposes. All right, so let's now open up our reports. Let's look at the journal report. I'm gonna right-click and duplicate and let's open up a journal report to see the journal entries we've been creating thus far. I'm gonna go to the Accounting drop-down reports and open up a journal, the journal report. This is my journal of activities. Some people like to write it down, write their journal with like prose text but this is what our journal looks like. Add a new journal, no, I'm not adding a journal. What are you doing? What are you doing? We're looking at the report here and let's make this as of the date, custom range and let's make it as of March 1st. So we had a reversing entry as of March 1st, boom. And so now we can see our reversing entry. It's a manual journal entry. We can also say that we just wanna see the manual entries up top and so we can see just our reversing entry there and we can generate this report and remember the reversing entries can be identified because they're always gonna be the day after the adjusting entry, the day after the cutoff, the day after 228, which is in our case March 1st because there'll be journal entries and because there'll be manual journal entries and because we're gonna post in the description that this is a reversing entry. All right, let's also open up a trial balance. I'm gonna hit the drop-down up top and I'm gonna go down to the reports again. I'm gonna make the trial balance for the whole year this time because this is the reversing entries are included in March, so we changed something after 228 after the cutoff date. So let's go to the drop-down and just say, we'll just say custom 2023, the end of it, I'm just gonna say the whole year and so this is where we stand. If your numbers tie up to these numbers, great. If they don't, then the things that we changed this time were of course the payable account and where's that payable account? Where's the pay, oh, it's gone now because we made it down to zero and then the interest expense account. Those are the things that we had a change to and remember it's not a change as of 228. We made it after 228. That's why we're running the report for the year.