 Hello in this presentation, we will continue with a comprehensive problem that problem dealing with putting in the entries from a theory standpoint into an Excel worksheet and then putting those same entries into Quickbooks in an attempt to compare and contrast the two show how everything gets put together similar to basically do in a long hand for example in a calculator Versus putting it into the Quickbooks and having the Calculations be calculated for us and that's going to be the idea of what we're going through here We did two last time if you weren't here last time That's okay because we're going to start from this point going forward If you want to see what happened last time then you can go through those instructional Videos as well and take a look at at those So this time what we're going to do is move to the adjusting process again if you miss the last two That's okay, and we're going to start from here forward and you can just move move from here forward in this Presentation we're going to move to Record and post adjusting entries, so we're going to post the adjusting process we're going to enter adjusting entries to Quickbooks and Then we're going to learn to master Excel and Google sheets as we go So that's going to be one of our objectives as we go would be to master Google sheets And Excel and learn how to put those things together as we go so We all we know that we have the normal rules for debits and credits when we're dealing with debits and credits and Those normal rules are going to be that we need to know how the board is set up our board here being the T account and we know that we have to line up the Accounts or the account types on the board as it's being debit balance accounts normal debit balances Liabilities having normal credit balances Equity like the capital account or retained earnings having a normal credit balance and then income statement accounts revenue having a normal credit balance Expenses having a normal debit balance We're going to keep going back to this using a similar cheat sheet to this the trial balance Always recommend having a trial balance open at least something like this open Or more preferably something like a trial balance open that can really help people out in remembering what the normal balances are Once we know what the normal balances are Then we can basically apply the general rule the simple rule of if we want that balance to go up We're going to do the same thing to it if we want it to go down We're going to do the opposite thing to it as what it is seems simple can be complex We'll keep on drilling this by doing it over and over again Through examples and going through this thought process in the adjusting process You want to keep this kind of separate in your mind from the normal journal entries because in the adjusting process We're going to have a couple of different set of rules that can basically help in In that adjusting process and those additional set of rules will be That all adjusting entries are going to be as of the end of the time period the idea of the adjusting entries is that We want to make the accounts correct on an accrual basis The adjusting process is going to be more than just the data input and it's also one of those areas where people usually have problems so It deals more with accrual basis Accounting so many times People have run into some issues when we're just learning the data input when we're just learning the quick book side of things We often run into problems with these adjusting entries if we can understand the adjusting entries Then we have a better idea of what the accrual process is why it is important And I'm going to also point out when the adjusting entries are going to be you know Something we really need to do to have a good picture of the financial statements and other times when small businesses Unless they're they're at the year-end doing their tax preparation or preparing financial statements for a bank loan or something like that May not be doing some of the adjusting entries. Why or why not? You know, what are the pros and cons of the adjusting entries in the adjusting process? Okay, then we're going to say that the adjusting entries are not going to have something included in cash generally the Adjusting process is going to be something done after oftentimes after the bank reconciliation has been done And therefore that the cash account is actually going to be good most of the time in the adjusting process So unlike normal entries where we said like 75% of the time we're dealing with one of the two accounts being cash The adjustment process we're generally not going to be dealing with cash at all So we're not going to be asking that question. We always ask before is cash affected It's not because it's a not a normal process entry. It's the adjusting process Then we're going to say that one account is going to be a balance sheet account The accounts above the capital account above this blue line in this case meaning assets or or liabilities One account is going to be an income statement account below of this blue line meaning revenue or expenses And we know that income statement accounts only go one way they go up So income statement accounts revenue has a credit balance it's going to go up with a credit and Expenses have a debit balance. They're going to go up with a debit if we can learn kind of these rules Then we can understand what to do in an adjusting process meaning which way we're going to go We're going to debit the account or credit the account without really knowing what we're actually doing Which can be good just to do rogue process at first then of course we want to get a better understanding of why What we're actually doing that's how we'll go through this will basically work out a system Say hey, which accounts going up which accounts going down then ask the question of why and How are we going to calculate that to get an understanding of it? We'll do that theory based in excel and then we'll do it in quickbooks as well The information for those two things excel and quickbooks are in the link below during the presentation So if you scroll down you'll have a link and that link will take you to a download the excel file It will look something like this and it will also have a link to download the quickbooks file It's just a backup file. So you would need the quickbook software to run the quickbooks, but And I don't expect everyone to do that. It's okay if you don't have the quickbooks, but just See that the same information could be in quickbooks could be an excel We're doing the same stuff here want to see how it ties out in excel and then apply it to quickbooks We also have another link to a Google Sheets doc So excel is going to have a lot more detail in terms of what it can do to Google Sheets But Google Sheets does everything we really need it to do right now and when we're learning excel We really want to learn the fundamentals. So I so the fundamentals add an extra tracking. What's the name of a cell? How do I move a cell around? That's really what you can get a handle on doing Problems like this. So that's what we will work through as we go through this This is going to be the quickbooks file The quickbooks file just has some data that we put in before we started off entering the data for the starting of the company and for one month of the company and This is the trial bounce we have here You can see that the trial bounce we have here is the same as the one we're going to start out on our Excel worksheet the order is going to be a little bit different because notice we're not using account numbers and the reason I'm not going to start off with account numbers because a lot of small businesses don't use account numbers it can it could I like account numbers, but it could be confusing at first because Many people don't really understand the ordering of the account numbers meaning we often feel like the account numbers are going to be the Number one driving factor of the order of accounts just like if we don't have the account numbers We might feel that it should be ordered an alphabetical order But it's not even if we put account numbers in there It's going to be ordered by the type of account meaning assets then liabilities then equity accounts then revenue and expenses So Beginners oftentimes when they put in account numbers have account numbers that don't make sense meaning they're out of order Because we applied account numbers out of order So therefore what QuickBooks is going to do is it's going to order these accounts first by account type Then by alphabetical order and the drawback of that is that every time we put in a new account It's going to go into either assets liabilities equity income or expense But within those subcategories it will be ordered by order of accounts also note that we don't have Zero entries here all we have are entries that have actual things in them when we're dealing with QuickBooks All right, so that's going to be the the data we're going to work with and We'll put it into excel first and we'll put it in here We'll do one thing at a time and go through this piece by piece So i'm going to check a few things so i'll be back in just a second here's the first comic of Of the day Okay, so let's see what we have So we're going to put up the excel sheet first So here is our excel sheet and we're going to look at the adjusting entries now what we have done so far We've put all the entries in in this tab over here So if you open up the excel sheet, it's going to have two tabs on your excel sheet mine has more than that But this is what we have entered prior to this time period for the month This is the trial balance that has been generated from that data This is where we're at as of the end of the month these sales this reference you don't need to know this but this reference Is pulling these same numbers from this trial balance So we call this an unadjusted trial balance. It's just a trial balance before We do the adjusting process and the adjusting process might be done oftentimes It could be done like at the end of the year by a cpa firm if it's a small company And you're working with a with a cpa firm or it might be done in a different department an adjusting process And adjusting process often having a worksheet similar to this meaning it's often done in some specialized software or software outside Of the normal accounting system so that we can see these adjustments and we can document these adjustments When we're in public accounting We do similar types of adjustments and similar worksheets to make sure the financial statements are correct As of the specific point in time the end of the year. So that's what we're doing here We're saying what do we need to do in order to make things correct as of the end of the year One thing I want to point out before we do that is that Most people when they when they hear that they think that uh, that means that the accounting department did something Incorrect And that's that's not true that the accounting department did not necessarily do things something incorrect What happens is we set the system up In order to make sure that we're going to have these adjustments at the end of the process Why because logistically it makes more sense. So when we go through these Think about how the adjustment works also note that they're not errors And we'll think about why we would set a system up in which we would need to make these adjustments at the end Why aren't we just running in the accrual process all the times and therefore not needing to make an adjustment at the end Of the month or the year Okay, so let's see what we have Where's our data Data first one we're going to say as of 5 31 the date of the end of the month the time we're going to put this information into the The journal entry we have prepaid insurance of Prepaid insurance 12 month policy 2400 so what's happening here one month has gone by And we have an insurance policy for the entire year So before we get into what we're going to do or why we're going to do it I'm just going to try to figure out which two accounts will be affected Now remember we said that we're going to just going to be one balance sheet account below above the blue line of the light blue line In one income statement account below if we have our trial balance, we can kind of look for those We're going to say him we're dealing with something with insurance. How about prepaid insurance? I'm going to highlight that yellow and say that's the one we're going to deal with on the Balance sheet side. What about on the income statement side? And again, we should have something related to insurance. It's not going to be tricky We have prepaid insurance or insurance expense here So we so we know that we know those two accounts are going to be impacted even if we know nothing else We know that income statement accounts the the dark blue accounts. They only go one way up We know that expense accounts. They only go one way up in the expense direction. Are there exceptions to the rule? There will be we'll talk about those later, but for the most part we pay the insurance The insurance doesn't pay us it goes one way up Expenses have debit balances Therefore, how do we make something go up? We do the same thing to it, which in this case would be another debit So we're going to debit that expense account. So we know that without even knowing kind of why we're going to do it So i'm going to copy and paste this i'm in cell g 22 so rather than typing it into the journal entry i'm going to copy this Right click copy And i'm going to paste it up here. I'm going to paste it in cell c 5 and we're going to right click Paste it 1 2 3 just the values only The date is going to be as of 5 31 And i'm not going to put an amount in yet We'll think about that in a second what I want to know is what's the other account going to be If there's only two accounts that are going to be there One's going to be insurance expense the other is going to have to be prepaid insurance if we debit the expense We're going to have to credit prepaid insurance So i'm going to go ahead and copy this right click copy Put it in c 6 right click and paste it 1 2 3 So without really even knowing what we're doing except that we're doing an adjusting process and we're dealing with insurance We can know which account is going to be debited in which account is going to be credited Now we just need to know the numbers and why why is this happening? So if we think about what happened here, we're going to say okay prepaid insurance has 2400 in it Why is it up there in an asset in the first place and not as an expense? Because we told the accounting department. Hey whenever you pay the bill for the insurance You put it into prepaid insurance. Why because prepaid insurance by definition is something we pay for before We um We use it So this is one of those things we're setting the system up in such a way that the bill can just be paid And always just go to the prepaid account. That's logistically easy to do And then at the end of the month where we are going to then adjust it So that the financial statements are correct as of the cutoff date as of the date we make the financial statements So we're saying okay account department. You just write the check and it'll go into The prepaid insurance now it's the end of the month. We need to make the financial statements We need to see how much of that policy has now been consumed. How would we do that? I'm going to do this with a formula or let's do with a calculator first. We'll Calculator first we'll say that We had a policy of 2,400 For 12 months. So if we divide by 12, that's 200 a month one month has now passed Therefore, we've consumed 200 I'm going to do that same formula here. We're saying this equals 2400 divided by 12 Means that we have 200 that has been consumed We're going to have the credit the same thing credit of 200 Now let's post this out. Let's see if it does what we believe it should do So we're going to say I'm going to post the prepaid insurance first So here's prepaid insurance. First of all, is it an asset liability equity or expense account? It's green and it's up and with all the other assets And so it's going to be an asset account And if we credit it we're doing the opposite thing to it as what it is a debit asset account Therefore, it's going to make it go down. We're going to show that in column i this will be our adjustments So in column i9 We're going to say this equals and post to this credit This is debit. That's a credit that 2400 is going to go down 2200 does that make sense? Well, we had a policy of 200 A month we just figured out and there's 11 months remaining So we would say that should be 2200 that is still prepaid that seems to work out Let's post the other side. So we're down here on prepaid insurance I'm going to post it with formulas notice. We're out of balance down here Equals and we're going to scroll up. I'm going to point to that 200 Scroll down. What's going to happen? It's going to go from zero up by 200 to 200 We're back in balance the debits equal the credits Debits equal the credits the debits minus the credits equal zero What happened to our net income? Well expenses went up net income went down meaning this credit balance is going Down right so it went down by the 200 to the 5400 and 60 So we can do the same information in quickbooks now quickbooks normally tries to Stay away from journal entries But this is the one problem where we can't really stay away from journal entries even in quickbooks We typically will use journal entries. So we're going to go to the company file And we're going to make journal entries And we're just going to put this same journal entry in here And we're going to put the date as of the end of the month 5 31 Make it 1 7 in this case and we're going to call it insurance expense And we don't have that yet Because we told the accounting department to always put their bill to prepaid insurance. So we haven't yet set up an insurance expense Account so we're going to tap. I'm going to set it up And I'm going to make it an expense type of account And there it is same thing here expense type of account It will be for 200 Tab tab tab tab Then the credit is going to be prepaid insurance what we have already set up This is where the accounting department is writing the checks every time they write a check This account probably just automatically populates so we can just put the data input there Really quickly and we're going to say save it and close See if it does what we think it should do So I'm going to say okay And there it is here. So I'm not sure if I Refreshed that I sold it not to refresh it. That wasn't good Trial balance I'm going to change that option. All right. So there we have that We're going to say prepaid insurance and insurance expense 200 on the insurance expense prepaid insurance is now 2200 same idea in both aspects Notice in quick book. We can't really see the links, however In the adjusting process if we use a nice little worksheet like this, we can say Here's where we started. There's where we ended and we can see how everything ties together That's one of the benefits of using a sheet like this I'm going to get rid of these yellow items and we'll do the second Adjusting entry same way same form We're first going to figure out which accounts are going to be affected and then talk about why Okay, so the next one is going to be See I'm going to make this one green that one is done Make it green and see what we have next. They're all on 531 the end of the month supplies on hand At 531 is 800 All right before we even talk about what that means why we're saying that Let's think about which two accounts are going to happen Which two accounts are going to be affected one will be above the the equity balance sheet account related to supplies How about supplies so we're going to say that supplies is going to be one account One account will be below on the income statement related to supplies Again, how about supplies expense supplies expense? Those are going to be the two accounts that we're going to be dealing with at this point And we know that the expense accounts income statement accounts only go one way this time Expenses going up expenses have debit balances. Therefore, we're going to make it go up by doing the same thing to it Which in this case will be a debit So we know that we're going to debit the expense the expense account even though we might not know why So i'm going to copy that And we're going to put that up top. I'm going to paste it in c8 Right click pasting it 123 just the values only If we debit the expense that means we must be crediting this supplies This supplies being an asset indicated by that's next to all the other assets and it's green So i'm going to say that must be the credit. Let's copy that And paste it in c9 c9. It's right there right click and Paste it 123 All right, so again, we know what the debit is we know what the credit credit is just by knowing That we are doing an adjusting process and uh by by applying these rules Of the adjusting process now. Let's talk about why why is this happening? Why are we doing that? And we're going to say supplies is 800. So how did we logistically set up the supplies process? And why does that make sense? Just like we did with the prepaid insurance whenever we the purchasing department buys supplies We're going to tell the purchasing department always debit Supplies the asset not supplies the expense Why because it's easier to do that way and then at the end of the time period We're going to go in and we're going to adjust it how by doing a physical count Seeing how much has been consumed and then making the adjustments Now this does not apply if we're talking about paper clips or something like that very small But if we're talking about fairly large items like ink or paper We're going to do a similar process that we would for inventory And if we just tell the supplies department in a periodic inventory type system to Purchase the supplies put it into the supplies account Then we're going to count it at the end of each month Figure out how much is left make the adjustment at the end of the month That logistically is a good way to do it to make the financial statements correct and make the data input during the month As easy as possible. So that's what we're going to do. We basically had a physical count and said, okay There's 800 left and if we say that that's what we need to make the supplies account be So at this point, there's 1200 in the supplies asset account. We need to make it 800 Therefore, what are we going to do? We're going to subtract those two. We're going to say that we need to take the 800 Uh, I'm sorry, not the 800. We need to take the supplies 1200 minus 800 and that should give us 400 that we need to reduce so the 1200 reduced by the 400 will bring us to the physical count the 800 There's one minor detail here that the 800 obviously isn't a physical count in units. That's dollars So when we count the units, we're going to have to say here's how many units we have converted to dollars Just like kind of any kind of conversion Which is kind of could be a you know a bit of an issue. We'll deal with that later But in essence, we're saying we have 800 dollars worth due to a physical count Meaning we got to take the 1200 down by 400 to get to that count of 800. All right, so let's do that 400 So we're going to say 400. I won't do the formula again Credit of 400. So now we're going to put the numbers in we'll put them in place See if it does what we expected it to do What did we expect it to do that supplies here should go down to 800? So let's see that first. We're going to put the credit here. I'm in cell i 7 equals And we are going to point to this supplies So we've got this debit and that's a credit those are opposites if we hit enter This is going to go down to the 800 that looks correct Now we'll do the other side. We're going to do the expense side. I'm going to scroll down here is supplies Where is it? supplies expense And we're going to say equals. I'm in i 20 i 20 Say that equals Think I must have hit a Oh, there it goes All right 400. All right, so now this is what happened here Then we had the expense go up brings net income down meaning the income Net income is the credit 7400 minus the expenses and the expenses went up So this is not a negative number meaning it's not a loss It's a negative number meaning credit on this worksheet I know that's something we just got to get used to with the worksheet But it is a very useful tool to have in that way Okay, so that's going to be that we're going to do the same thing now in quick books Let's go to quick books All we can do is just do it by a journal entry. So this is Some place where quick books cannot really avoid the journal entry. So we're going to go to company Make journal entries as of the end of the time period 531 That's the date. We're making the financial statements The accounts will be supplies supplies expense And we have to set up the new account and my computer is going slow here We have to set up the new account because we don't have the supplies expense set up We told the accounting department to put it into supplies the asset So we're going to say supplies is an expense account And it's an expense account and we're going to put the 400 And then the other account was supplies just put in the same transaction in And we're going to save it And I'll say save and new this time Then if we go to the trial balance and check it out, we can say that the supplies went to 800 That looks like the same thing there and then we have the supplies expense 400 if we check the other reports profit and loss now We can see is at 5060 and if we look at our profit and loss, we just did the quick calculation Of the trial balance given by the fact that we have debits as positive and credits as negative of that same 5060 All right next one. Let's say 531 let's get rid of the yellows and notice you can't put yellows if you're working through this problem here because I I locked some some of the cells just so you didn't accidentally delete some formulas So I'm trying to help you out by doing that not to Cause any problems from that But you can only enter data in the blue area so that you don't try to try to get rid of or delete formulas that could Not be good. All right, so now we will look at the next one. I'm going to say this one is done I'm going to make it green indicating that it has been done And move to the next one All right, now we're on depreciation equipment It's five-year property cost of equipment was 18 000 Okay, so again before we even talk about what depreciation is Let's just see if we can figure out what the debit and the credit related to depreciation will be It's an adjusting entry. So there's going to be one account in the balance sheet area above the blue line Related to depreciation. How about Accumulated depreciation sounds like it could be applicable. So I'm going to say that's going to be one of the accounts I'm just going to put make it yellow. That's what I'm doing here making it yellow And then there's going to be an account below the line in the income statement related to depreciation How about depreciation expense seems reasonable? And so we will take that I'm going to make that yellow All right. Now the expense accounts all expense accounts have debit balances. They only go one way They go up. So we're going to take this debit and we are going to increase it So we're going to do the same thing to it which in this case will be another debit So I'm going to copy that right clicking on g 21 copy Put our cursor on c 11 right click and paste it one two three The amount we know I'm not going to put the amount in yet. What's the credit going to be It's going to be the other account if we debited the depreciation expense. We're going to credit accumulated depreciation in g Uh 11 I'm going to right click that because I really don't want to spell that one out and paste it one two three All right, and notice if we wanted to make this look nicer with an indentation We could go put our cursor on all the credits go to the home tab alignment increase in dent Next one home tab alignment group increase in dent Next one home tab alignment group increase in dent. All right. Now. Let's talk about what we're doing why we're doing it What's going to be the number that we're going to need to use? So We're going to say let's see depreciation So depreciation is related to the equipment indicated by the fact that we're talking about the equipment here Now when we look at a real financial statements, we might have multiple pieces of equipment and the depreciation schedule Therefore will be quite complex But the concept is pretty straightforward meaning that when just like everything else logistically that we've been looking at Logistically we we told the purchasing department or the accounting department when you buy equipment You're going to debit property planting equipment not equipment expense not tools expense Then in the adjusting process at the end of the year or the month We are going to go in and adjust that that just makes sense or it's the easy It's an easy format to do that and so that means that they put the equipment on the books at 18 000 We then are going to reduce the value of that in accordance with the life of the equipment And so it's a five-year equipment 18 000. So we're going to say 18 divided by five would be it should go down by in value if it was straight line we'll talk about other methods later, but straight lines the baseline method of 3600 but that's for a year and we're only talking about a month So i'm going to go ahead and divide that by 12 And say it's going to go down 300 so 300 is going to be the number that we will use but note that we're not putting it to Equipment expense it's going to depreciation expense and that's that's slightly different. Why is it going to depreciation expense? Not equipment expense There's a couple reasons notice the supplies we did a similar activity here But the supplies we said was related to a physical count meaning we can physically see the deterioration in supplies However, equipment doesn't physically go down if we have one forklift. We still have one forklift It's just that the value has gone down Therefore if we create another account our first contra asset account asset accounts having debit balances Contra meaning it will have a credit balance Is going to be this accumulated depreciation Why do we have it to show our reader a couple things one? Hey reader here's the cost of the equipment and here's the estimate of the reduction in value If you want to know what we think the book value is you'll have to subtract the two And that gives our reader a little bit more information about this item an important item because it's a big ticket item All right, let's re-calculate that same number one more time. I'm in d 11 Equals we're going to put the cost 18 thousand divided by 12 months. I'm just going to divide it again by I'm sorry divided by five years divided by 12 And you could just put the 300 in there But I'm just showing you how to put the formula in Notice that it's almost easier to do that particular calculation in a calculator than in an excel Or at least do it first in a calculator But in any case the debit and the credit will be 300 Let's post that out see if it does what we believe it should do So i'm in i 11 i 11 i'm going to say that equals And point to the credit And it goes up in the credit direction the contra Asset account goes up in the credit direction bringing down total assets bringing down the book value Book value now being 18,000 minus 300 or 17,700 Then we'll post the other side which is going to be down here in i 21 Equals we're going to point to the depreciation expense going from zero up To 300 back in balance by the green zeros here and Net income Has gone down expenses went up brings net income down net income being the credit minus all the debits Let's do the same thing in quick books. So we'll go over to quick books here We're going to go to i i left it open this time i was smart and left it open that time. That's good So we're going to say 531 And we're going to say that we have depreciation I'm going to type in a real slow All right, and it's a new account again We don't have this yet This is the first time we have recorded depreciation expense because this is an adjusting entry and this these are our first adjustments So we're going to say 300 It's an expense type account the credit will be to Accume this is going to be oh, they have that already. So the system let put that in there I think okay, so there's our credit So that's good. We didn't have to type that in so i'm happy about that. So i'm going to say save and new And there we have that let's see if it looks like what we have been doing on the excel side of things we have Let's see Accumulated depreciation there now if it's if like if you're like me it might be very kind of annoying to you that the accumulated depreciation is above The depreciation the the furniture and a fixture And and again the reason that's happening is because both of those are in what quick book sees as the furniture and fixture area And it's in alphabetical order And that's why they did that in order to fix that we would basically need account numbers So that we can have this one traditionally goes before this one But anyways, so then we got the depreciation expense is going to be here if we look at the profit and loss then We see uh four thousand seven sixty. Is that what we calculated over here? four thousand seven sixty is the same So that looks good. That's a good indication That we have done things correctly so far All right next one. I'm going to say this one. I'm going to get rid of the yellow We're going to do on uh b 14 another five thirty one And we are going to have let's see I'm going to make this one green that one has been completed All right accrued wages five day work week uh weekend And pay on on friday. That's what it's going to say if I have the extended sale here I'm going to get friday Month month ends on wednesday. Okay, so this well before we get into what that means what we're trying to say there We're going to just figure out which two accounts are going to be impacted by this We're so we're talking about wages or salary something to do with payroll So if we take a look at our rules, we're going to say here are the accounts above The blue line the balance sheet accounts which ones are going to be doing with have to do with salary or payroll How about let's see what do we have here did did did prepaid insurance How about salaries payable seems reasonable It looks like a liability account it's in next to accounts payable in the liability section How about on the income statement? We're going to say that something to do with salary or wages and we got salaries expense We also know that these are expenses and they only go one way up expenses going up in the debit direction So how are we going to make? This go up we're going to do the same thing to it which in this case is another debit So I know if we're going to do something with this one We're going to debit it even if we don't know why So i'm going to copy that i'm going to paste it 1 2 3 c 14 And if we debit that and there's only two accounts then this one Will be credited so g 13 right click copy i'm going to paste it in c 15 right click pasting it 1 2 3 So we can know all that without knowing why and so that just by knowing those rules So now we're going to talk why why are we doing this? So i'm going to go to our Data here and we're going to say We have a five-day work week. So this is going to be a simplified work week We shook hands with our employee and we said we're going to pay you every friday for five days worth of work Therefore uh as of the end of the month We need to determine Whether or not it landed on friday or not. Why is that important? Well logistically again if if we're just going to say We're going to pay the employee every friday. We're not going to deal with an accrual basis I'm not going to accrual every hour they work and say hey, we owe you an hour's worth of work It makes a lot more sense for us to tell the payroll in our accounting department Hey, just be on a cash basis with this particular thing when you pay when you write the check on friday That's when you record uh the the debit to wages expense and the credit to um wages payable or cash Then when we go in and we see oh, there's some wages that are still owed Then we'll make that adjustment. Why would that be because friday will almost never land On the end of the month the friday is not going to land on the 31st in this case. We're saying it landed on wednesday So what does that mean? It means this employees worked monday tuesday and wednesday And they haven't gotten paid yet Because they're not going to get paid till next month So if we make the financial statements as of the end of the of the time period We're going to have to record the fact that we owe Our employees this amount a liability and that they have earned it We've we've used their services and consumed an expense in that case Recording the expense and the related liability at this time period This is one of those entries that a small business might not do as often If uh, they're not trying to get a loan or something like that Because it's one of those entries at the end of the month. That's a timing difference But on an accrual basis it could be very significant if you if you get a loan or something And the bank wants an accrual basis It could be very significant to accrue the payroll that is owed as of the date that the financial statements were We're generated. So that's what we're going to do and so we're going to say that accrual wages And they we're just going to give the amount in this case, which was a 960 Let's see accrued wages five day work week weekend pay day on friday Month ends lands on wednesday. So I think actually I think what we're saying is this times We're going to say that this this 960 we're going to say that that's for the end of The week which we're not going to pay or we did pay After the month end. So I'm going to say 960. That's for a five day work week divided by five That's going to be a 192 a week And then if they worked monday tuesday and wednesday times three That's going to give us five 76 So i'm going to say this way we're going to say this equals the 960 divided by five times three days And that'll give us the five seven six All right That's going to be the debit and if we debit that then of course, we're going to credit the same amount five seven six And we can record this out see if it does what we think it should do We could indent this I go to the home tab alignment increase indent and we then go to uh Salaries payable that's an i 13 equals point to that credit And that's going to make the liability go up in the credit direction. So that's not going in the hole It's going up in the credit direction Then we're going to go to the salaries expense And salaries expense and we're going to say that that equals and we're going to point to the five 76 And that's going to increase the expense to 1,536 bringing net income down to 4,184 that being calculated as revenue minus expenses All right, so now let's see if that did what we if we can put that same information into quick books Quick books, so we're going to say the journal entries and we're going to say as of 531 They're all as of 531. We have salaries expense. We've already recorded salaries expense So it's popping up automatically for the amount we said of uh 576 576 and then we've got salaries payable That's going to be a new account tab We're going to have to set that account up. What should it be? It's going to be a liability. So i'm going to put it down here in other other current liabilities Continue Same information here and save it All right. So now we're going to save a new And let's see if it did what we should do. We're going to say that we have The wages payable That's accounts payable Where did the wages payable go? Salaries expense. So now i'm going to drill down on this that recorded Oh, here we go. So it didn't record. So this is 576. I didn't put the other side there That's a problem And save and new There we go trial balance And There it is. All right. So there's that There's the salary five one five three six. Is that what we have here? One five three six and net income four one eight four. So let's check that We're going to go to profit and loss We're going to say four one eight four All right. So everything looks okay. So we're going to go back here and I'm going to unyellow these we're going to say that's going to be unyellowed And next one five thirty one as they all are as of the end of the month. That's what the adjusted entries do Um, and we're going to go back to our data I'm going to make that green. We have completed that And see what the next one looks like Prepaid rent as of five thirty one All right. So now we're going to do a similar process again I'm not going to go through why we're doing this prepaid rent what it should be But we're just going to see this is an adjusting process which two accounts will be affected One's going to be a balance sheet account above Of the line here. We'll have a balance sheet account related to something to do with rent. How about prepaid rent? We're going to say that's going to be one of the accounts that we will be dealing with prepaid rent One of the accounts below the line in the income statement having to do with rent in some way How about rent expense? We know that income statement accounts including Expense accounts only go one way up. These are debit balance accounts We're going to make them go up by doing the same thing to them Which in this case would be another debit? So i'm going to say that this is going to be a debit g 19 copy that expense Put it up top in c 17 right click paste it one two three Then uh, we're going to do the same that means that the other account Prepaid rent will have to be the credit. So i'm going to copy prepaid Rent put it on the credit side in c 18 right click paste it one two three And then i'll go out of the home tab alignment and increase the indenting Okay, so i'm going to check something real quick and we'll see our next comic of the day That doesn't want to go to the next comic of the day Do this There you go All right, so let's see what we have here Here Okay, so now we've got the debits and credits again. We can do all that just by knowing it's the adjusting process and Just knowing the rules for the adjusting process without even knowing why we're doing what we're doing Now let's talk about why we're doing what we're doing and we have prepaid rent So we're going to adjust the prepaid rent account And in order to do that we're going to say that we're going to Need to know what's still in prepaid rent in this case being 10 000 What is prepaid rent? How did it get there? So again logistically if the bookkeeper Purchases rent or pays for the rents of the rents of the facilities They could either debit the expense rent expense or debit prepaid rent and then credit Cash when they pay it now If we're just paying monthly The easy thing to do is set the system up so that every time they pay it's just going to debit the expense account But if we typically pay in advance Or if we have a one-time case where we pay in advance For example, if we paid the entire years worth of rent, then we would want to first put that information into A prepaid account for a similar reason as we did with the insurance So we're first going to put it into the prepaid account and then expense it And so we're going to tell the bookkeeper just put it into the prepaid We'll make the adjustment basically at the end. That will be the simplest way to to deal with this So in order to do that, we have to determine we're not going to get into how it was determined in this case But we determined that Pre the prepaid rent should still be 10 000. We have prepaid rent on the books. Let's see prepaid Rent up 12 000. So we need to bring that down to 10 000. That's what we determined it should be So we're going to say, okay, there's 12 000 there. We need to say minus 10 That means we need to bring it down 2000. So that 12 000 minus the 2000 will bring it to what we determined it should be 10 000 So let's do that again. The formula over here is going to be equal to 12 000 minus 10 000 Enter and that will give us the 2000. That's what we're going to bring it down to That will be the debit and that will be the credit of the same 2000 Let's post this out. See if it does what we believe it should do Meaning it should bring that 12 000 down to 10 000 the amount we determined it to be so in i What is that i8? equals and we're going to point to prepaid rent the credit bringing that debit down with a credit to 10 000 then we're going to go to the rent expense. So we'll go down here to rent expense And in i 19 Equals we're going to point to this 2000 that'll bring the zero up by 2000 to 2000 Put us back in balance and it'll bring net income down So there we have it. So we have the uh expense went up brings net income down Let's put that same information into quick books All right, quick books. We got the make a journal entry and we're going to say same thing here We're just going to have to put it in as a journal entry. We're going to say rent expense We don't have it yet because all we did was do a prepaid rent So we're going to tab we're going to set it up. It will be an expense. So expense It's going to be the same information expense And it will be for 2000 we will also have a credit of prepaid Rent make sure you get the rent and not the insurance and uh, that'll be for the same amount save and new Let's see if it does what we think it should It should connect just like we're doing in our worksheet. It should connect everything together if we go to the trial balance We're going to say hmm prepaid rent is now at 10 000. That's what we determined that it should be and we can see that the um Rent expense 2000 that looks the same That looks correct That looks like we could move to the next and final one and we have to stop after this one Because that's our last one. So that's uh, we'll have to really Enjoy this last one. So we're going to say this is also as a 531 as are all of the adjusting entries I'm going to make this green Saying that we have completed that And next one's going to be related to unearned income Again, we might not even know what unearned income is But we are going to look at our accounts and see if we can figure out what the uh, two accounts will be One's going to be a balance sheet accounts above this blue line An asset or a liability account And it's going to have to do with income or unearned income And how about unearned income? So that one unearned income here We might not know what that is But we can see if we have the trial balance that it's next to the liabilities It's orange in this case which means it will be an liability. So we know it's a liability What's going to be the income statement account related to unearned income? A little bit more difficult, but we're going to say it's going to be revenue or income income or revenue and unearned income So those are going to be the two accounts We also know that income or revenue is an income statement account and all income statement accounts only go one way for the most part Up and this has a credit balance represented by the fact that it has brackets How do we make something go up? We do the same thing to it, which in this case is a credit Because it's a credit balance. So we're going to credit it to do the same thing to it making it go up So i'm going to copy the income And we're going to put it on the bottom because credits traditionally go on the bottom in c21 Right click paste 1 2 3 Note this one's a little bit backwards than what we've done before Because most of the accounts we adjust when we deal with timing differences will be where there's more accounts in terms of the income statement Expense type accounts and this one of course has to do with the revenue type account And therefore the revenue is going to go up with this one We can go ahead and indent that as we go go ahead and home tab alignment and indent That means that this must be the other account that must then be the debit So i'm going to say copy we're going to put the unearned revenue of that this unearned revenue account Which should probably name the account but we'll put that on top And we know the debit and the credit therefore just by going through These set of rules even if we have no idea what unearned income or unearned revenue is And now let's figure out what it is and see why we're doing this. Okay, so unearned income as of 531 The reason unearned income is is more unusual to most people is because not all companies will have unearned income It's going to be kind of industry specific in many ways, but it's a really good test of what the revenue recognition principle is and what The accrual principles are so what unearned revenue means is we got paid before We did the work now typically we probably think of it the other way around meaning if we do a service company If we do bookkeeping we often do the bookkeeping or the taxes before we get paid Meaning we didn't get the money, but we did the work. We earned the revenue. We didn't get the money This one is reversed we got paid, but we didn't do the work When does that happen? Well, you can think of it like if you have a rent and the security deposit Is kind of a form of unearned revenue meaning you paid the first month rent the people that received the money Got income, but they didn't earn that income Because you haven't lived in the in the in the Facility for the last month or or the security deposit hasn't been Consumed it probably you'll probably never get it back, but you know it's technically not been there yet So therefore it shouldn't be revenue If you have a concert or something like that clearly you got to sell the tickets before you have the concert If you sell tickets before the concert it hasn't been earned Therefore it really shouldn't be revenue until the point in time that the concert happens Another business is of course a lot of businesses are subscription related So if you're buying a subscription of some kind like a magazine subscription or any other type Of services a lot of the software and stuff is month to month type subscription Thanks if you're buying a year's worth subscription Uh to to a particular software or something like that Those are industries where the payment happens before the service happens So that's why the unearned revenue happens It's on the books because in that particular industry we got money Before we did the work if that's the case if we sell newspapers we get money before we do the work We again logistically we're going to tell our accounting department. Hey Whenever you get money from a client Just uh debit the cash account and the other accounts just going to go to unearned income Just put it into unearned income and then at the end of the month We're going to figure out how much of it has been earned And that's just how we're going to set the system up because it's an easy way to Set the system up. So at the end of the time period we determined after our calculation that we're not going to get into now That the amount that is still unearned Meaning the amount of newspaper subscriptions in the future that we got paid for that we have not yet You know sent out or broken any windows with those papers Is three thousand So that means we got to get this number 4500 down to 300 3000 So 4500 minus 3000 means That we need to take this 4500 down by 1005 to get us to 3000 that we determined it should be All right, and and we don't need to know the debits and credits because we already figured that out So but once we post it we want to think about it. We already know that we're going to have the 1500 What happened there? It's going to be a debit Here to under an income Yeah 15 All right, it's going to be a credit here. We already know that because we figured it out before but let's put it together And see if it does what we think it should do it. Does it make sense? We're going to post this one out first I'll post the under an income in i 14 equals pointing to this 1500 That's a credit. That's a debit. Those are opposites making this account go down to What we wanted it to go to 3000 Then we're going to do the same thing for the revenue. So revenue is in i 17 equals we're going to point to this 1500 This is a credit. That's a credit. Those are the same things. It's going to make revenue go up Also, going to make this go back in balance and make income net income go up So there we have that and this one's increasing the net income All right, let's post this last one to the quick books as well And see if everything ties out as we hope that it should And we're going to say that we have a debit to unearned fees Which we already have because we've been recording that And the amount will be What did we determine? 1500 So 1005 Debit we're going to credit revenue Or income for that same 1500 save and new Trial balance unearned Fees now at 3000 and our income now at 8,009 unearned fees over here was at 3000 and Uh income eight nine. Let's check the net income just to round things out 3684 And we go to the net income over here is going to be the 3684 So so that basically that's going to be the adjusting process Now again a lot of when I look at small businesses A lot of times they kind of worry about the adjusting process because this is the process that does take A knowledge of debits and credits in order to do the data entry just putting in the data and setting up The system in order for the data entry to be automated can be set up Especially if you have a well designed system so that the data can be just you know Put in place and the accounts hit what the accounts should hit And then set up a system where basically we can do the adjusting entries at the end of the month Or the end of the year making the accounts correct as and of a cruel basis as of that time Small businesses can do that with with a cpa firm or have some Someone to help them out with that adjustment process And and again if we're small businesses that aren't looking for financial statements For a bank or something like that some of these entries Maybe things that they're they're not doing some of them are things that they should have a good idea For example depreciation is something that you probably want on your financial statements in order to make good decision making processes Something like the salaries expense every month might not be as useful to a small business because It might not be adding the value to help them make decisions and costing more in terms of time Versus versus the value in terms of decision making But if they if you need it to make the financial statements as of the end of the year either for taxes and or for Getting a loan or something like that That the the books will have to be most likely put on a accrual basis, you know more specifically And have these adjusting entries put in Place so those are going to be the adjusting entries quick books is an area We still just have to do the debits and credits For the most part there's are there are some ways you can kind of work around it But they're just as confusing As as doing the debits and credit. Okay, so next time what we're going to do is we're going to take this adjusted trial balance And we're going to put that and make the financial statements with it And you'll note that the that quick books has been doing that the entire time here We've been looking at the financial statements That's going to be the profit and loss and the balance sheet as we go But again quick books just kind of pops it on the screen And we might not know how it's working and just like we are doing with a calculator here if we said You know 5,000 or you know times 21 we'd have you know the calculator will do that But we need to have some understanding of what it's doing And so what we're going to do is is basically next time in excel Worked through this adjusted trial balance to make the Financial statements to balance sheet the income statement the statement of equity as has been generated From quick books as we go to get an understanding of How this trial balance Is the same thing as basically the balance sheet and the income statement How it has to work if this thing's in balance This thing has to be in balance by doing that. I don't expect everybody obviously to be Generating financial statements by hand all the time just like I don't expect anyone to do manual multiplication of complex problems by hand But we do need to want to understand how they're put together That way it'll help us to interpret how to do the data input And what the data input is doing and therefore help us to make decisions With what the output is from quick books From the data that we put in then next time We're going to do the closing process and talk about how quick books does the The closing process and the kind of the pros and cons of the general quick setup of quick books In the closing process, you don't have these two tabs in the current worksheet They'll be included in the next worksheet. If you haven't done these steps for the next worksheet You can just go to the next worksheet forward without these steps. We're going to do the same thing Starting with a worksheet that could start from here forward Um, but if you want to go through these that's good, too There's going to be some hopefully if these worked there'll be some instructional Videos on those to look through what has been done in the past