 QuickBooks Online 2022, adjusting entries and reversing entries introduction. Get ready because it's go time with QuickBooks Online 2022. Here we are in our get great guitars practice file. We set up with a 30 day free trial holding down control, scrolling up a bit to get to the 1 to 5%. We're currently in the homepage, otherwise known as the get things done page. It's something you can do by going to the cog up top and then going down to switch to the accounting view down below. We will be toggling back and forth between the two views either here or by jumping over to the sample company file currently. And the accounting view back to the get great guitars. We're going to open a few tabs to put reports in by right clicking on the tab up top and duplicating it back to the tab to the left. Right clicking on it again and duplicating it again. As that is thinking, we're going to jump back on over to the sample company just to note where the reports are located in the accounting view, which is on the left hand side under this word of reports. If we go back to the business views second tab reports are located in the business overview and accounting view, which is on the left hand side under this word of reports. If we go back to the business views second tab reports are located in the business overview and then in reports. Want to make sure you're on the standard tab here closing up the hamburger. We're just going back to the basic balance sheet back to the basics with the balance sheet. And then we're going to go up top and do the range change from 010122. And I'm going to make this as of 022822. That is our cutoff date as we think about these adjusting entries running it tab to the right. And then I'm going to go down to the business overview again. We're going to go then to the reports and let's take a look at the profit and loss to P and L the income statement range change up top from 010122 to 022822. And let's also change actually the months here bring it out to the months and run that one. So there we have it. So we got the two months. So now we're just going to think about these adjusting entries and the adjusting entry process. I'm going to jump to the balance sheet to do that. The first thing we want to understand with the adjusting process is that we want to keep it separate in our mind from the bulk of the accounting process, the bulk of what the accounting department does. In other words, the accounting department's job is to enter the forms that are going to enter the financial transactions actually recording those financial transactions that will then be used to construct the end result. The end product, that being the financial statements and supporting reports to balance sheet the income statement or profit and loss. The adjusting department is there on a periodic basis to make any adjustments that would be needed in order to have those reporting of the financial statements be more accurate as of the reporting date, which is going to be typically the end of the month or the end of the year. So the adjusting process is something that will often be done by like another department or possibly by an outside CPA firm that will be working with the accounting department. The accounting department will of course be the bulk of what is going on with the accounting process because they're actually the ones that are entering all of the data that are being used to construct the financial statements. And then there's just going to be adjustments possibly that will be made on a periodic basis to get the financial statements to be a little bit more accurate in accordance with whatever kind of method they need to be accurate in accordance with, which might be an accrual method, a cash method, and or for tax preparation purposes. Smaller companies might just have an adjusting process that they would be using on an annual basis. In other words, they might work with a CPA firm on an annual basis that will take their information from QuickBooks possibly making the adjustments they would need in order for at least to prepare the tax returns. And if they need to then present the presentations externally or they want more detailed information internally, they might also make the adjustments for internal reporting bookkeeping purposes to put the financial statements closer on an accrual basis or closer to a cash basis, whatever the basis that is being used on a periodic type of basis. The larger the company is then, the more likely then of course you're going to be doing the adjusting process on a monthly type of basis so that you can then do the data input during the period. And then at the end of the month when you're going to be presenting the financial statements and the end of the quarter, do the adjusting entries so that the financial statements are reported as clearly as possible, typically at that point on some kind of accrual type of basis. So if we look at the accounting process, then this is what we went over through the accounting process. If you're working in the accounting department, you might be working as a bookkeeper. You might be working, you know, doing the full accounting process for a smaller type of company or if you're working in a larger company, you might be working in a sub area of the accounting department, which would be like in the vendors area or in the customers area or in the employees area or in other words in the purchases cycle or in the accounts receivable or revenue cycle or in the payroll type of cycle. And that's going to be the bulk of the accounting process entering the data with these forms that are used to construct the financial statements. However, sometimes it's easier to enter the data in such a way for the accounting process that isn't exactly lined up with the basis that's being used for the reporting purposes, for example, accrual accounting. This will happen more often and you'll have more adjusting entries if you're using an accrual type of basis typically than if you're using a cash type of basis. That's one of the benefits of a cash type of basis. You might have less adjusting entries. And just to touch in on that, a lot of people might say, hey, look, I'm not going to even deal with the adjusting entries because I'm on a cash basis. And so I'm not going to have any adjusting entries, but you still can't get away from some accrual concepts and some adjusting entries. Typically, there's still some things that you may need to do adjustments for on a periodic type of basis. If you're a smaller company on a cash basis method, you might be able to limit the adjusting entries to a much lower level than a larger company that's on an accrual basis. But for example, the tax code will require you to put the information for any large purchases. So if you purchase a large piece of equipment or something like that and you paid cash for it, you're still going to have to put it on the books as an asset and depreciate it, at least according to the tax code, if not, and you can also do a book depreciation. So that is one example of an item that you can't really escape from. And that means you're going to have to do a depreciation schedule and you're going to have to figure out what's going to be the amount of the depreciation you can take on a periodic basis. So you can be on a cash basis and an accrual basis, but in reality, no one is exactly totally on a cash basis if they have a large enough company because there's going to be some components for which, at least on a tax basis, you're going to have to do some accrual components. And that means you're most likely going to have to do some adjusting entries. The fixed assets is one of the most obvious kind of examples for it. Now also note that when you think about this adjusting process, a lot of times people that work in the adjusting department typically start to think like they're fixing the problem of the accounting department. And that's not the way you want to look at it. When you're doing the adjusting entries, you're not fixing errors per se, although you might have some errors that were made that you are fixing as you're doing the adjusting process. So at the end of the year, for example, if you're working out a CPA firm, then you're doing adjusting entries to get the financial statements correct as of the timeframe, as of the end of the year. Or in our case, it'll be at the end of the cutoff February 28. But because you're doing adjusting entries doesn't mean that the accounting department did things wrong. They may have done some things wrong and you'll fix those kind of items possibly as you go. But the normal adjusting entries are part of the system. They're part of the system because the accounting department that is putting the data input in is not just geared to getting the financial statements perfectly on the accounting basis they're in, such as an accrual basis with every data input transaction, meaning that there's going to be some tradeoff between having your financial statements on a perfect, say, accrual basis or whatever basis they're on, cash basis, tax basis, and the ease with which it is to put the data into the system. So for example, if you're looking at the payroll cycle, you're going to set up your payroll cycle for whatever payroll cycle works best for your internal needs, for your employees, and for just processing the payroll. It's complicated enough dealing with payroll taxes and so on which has its own schedule of stuff that you need to pay and the withholdings. And so you're going to be doing it whenever the cycle happens. That's going to be weekly, bi-weekly, semi-monthly or whatever. If the payroll cycle doesn't land on the cutoff date, you're going to have some accrual differences that you might then need to adjust for to make the financial statements actually correct as of a cutoff date at the end of the month or year. And so when you make that adjusting entry, it's not like you're fixing the payroll cycle's problem of not recording it properly. What's really happening, as you said, is we've made a system saying, hey look, I'm going to run the payroll during the payroll processing as efficiently as possible from an internal perspective. And then I'm going to plan to make an adjusting entry on a periodic basis, and that will mean that at any given time the payroll might not be perfectly on an accrual basis, but it will be on an accrual basis when we report the financial statements typically at the end of the month or the end of the year, because we'll do an adjusting entry in order to shore up or make that happen. So that's going to be the general adjusting process. And also note that if you're in the accounting department or if you're a bookkeeper, then you might be in a situation, especially if you're a bookkeeper and you're working with like a CPA firm, then you might say, well, I'm going to learn the adjusting entries and I'm going to do the whole thing so I can do everything perfect, but that's not always what you want to do because it could work quite well if you say, hey look, I'm going to let the CPA firm or the tax firm do the adjusting entries that are going to be necessary. I'm going to focus on my side, which is entering the data as efficiently as possible. And these days, using the bank feeds for certain industries can be more efficient as well. So you might come up with a system and you're going to say, hey look, I'm going to enter more on a cash basis or do as much as I can to make the data input as automated as efficient as possible. I'm going to tell the CPA firm exactly how I'm entering the data and then I'm going to rely on the CPA firm to make the periodic adjustments at the end of the month and the year. And you see the goal of that then is to be able to do the data input efficiently on the data input side of things and to be able to shore it up periodically so that things are going to be faster and things will work hopefully more smoothly and you get the reporting needs that you need to meet. Although you're giving up by doing that, the more detailed financial statements that you would have on the inter-periods. In other words, if you're a bookkeeper and you're relying on the CPA firm to shore things up on a yearly basis to do tax preparation for smaller companies, then that means that through the year, your books are not exactly on an accrual basis because you're basically just doing the cash basis or you're doing the data input that's as efficient as possible. And then at the end of the year, the CPA firm hopefully can shore up any of the problems in order to report the financial statements on a tax basis at that point in time. So let's just go over some of these accounts and some of the adjustments that might be made. Now normally you kind of look at the balance sheet accounts. A classic kind of normal adjusting entry will typically have one balance sheet account and one income statement account because normally they are accrual type of adjustments. They're adjustments to take the financial statements to more of an accrual type of method. And therefore there's going to be a timing account related to it, the timing account being the income statement account. So normally at this point of time, the adjusting entries will not include cash because we've already done the bank reconciliation. Cash is right. Cash is good. Cash is not going to be adjusted at this point. So these are things other than cash. If cash is affected, usually the fact that cash is affected, we can kind of check that into some degree with the bank reconciliation. So these adjusting entries are typically non-cash. We might have an adjusting entry for accounts receivable and that adjusting entry might be a situation, for example, where we have a receivable that was put into the system after the cutoff date for which we did the work before the cutoff date. In other words, if you think about a system like this, you could say when I entered the invoice right here, that is when the revenue is recorded. But if you think about a job cost type of system, it's quite possible that I entered the invoice in say the following month. In our case, the cutoff is going to be the end of February. So the end of February is our cutoff. What if someone entered an invoice in March but they had a job cost system where all the work was actually done in February. But they didn't get to bill in it till March because they had to count up all the hours and bill them in March. And that kind of situation from an accrual standpoint, you actually should have recorded the income when you earned it in February in that event. So you could have a situation where you should be pulling back the revenue to the prior time period. So we could have an adjusting entry in that kind of instance. And we'll take a look at that. Notice it's a timing situation in that the system records inventory or revenue when the invoice is entered because that's as close as it knows. That's the closest document to when the work was done. But if it's still substantially after when the work was done, you would still want to go back. And then we've got the inventory account. The inventory account could have adjustments based basically a physical count. You could basically do the physical count, possibly have an adjusting entry related to the physical count of the inventory. And if you're on a periodic type of basis, then of course you would be doing an adjusting entry periodically to adjust the inventory. We're using a perpetual inventory method here. And then we've got the prepaid insurance. So any kind of prepaid account prepaid insurance being the primary kind of example of it because insurance is always prepaid. Unlike if you're talking about something like utilities or like the telephone bill and so on. You usually incur the expense and then you pay it. So you expense it at the point in time you pay it. But for insurance, especially considering you often pay for insurance like months in advance like a year of insurance upfront. And then you don't get the coverage till after you pay for it. Then typically what we would want to do is put it on the books as an asset and then record the amount that we have consumed periodically over the time frame that we've benefited from it. That's the same concept by the way as the fixed assets down here. It's just that the fixed assets are the extreme example. So with a fixed asset, if you purchased a building for cash, then you're going to have to put it on the books as an asset. You just expense the whole building because if you did that and the only reason you would want to do that really to expense the entire building would be for tax purposes to get a tax benefit because that would be a deduction. But for reporting purposes, it would really distort your comparison from one period to the next. In other words, you can see if I looked at my income statement and I expensed a building that was 100,000 in January and then I compared it to February where I'm using the building. But I didn't actually buy it in February. It would look like January was a horrible month versus February because I have this expense that really should have been applied out to the following months and now it's going to mess up my comparison. That's the whole point of the accrual process to have a fair comparison from month to month to measure performance. So the same thing is true with the prepaid insurance up top but to a lesser degree. So the prepaid insurance you might say, well, that's small enough that it's monthly so I might just expense it as I go. But if you pay for a whole years of insurance up front then it could start to get substantial. We'll have an adjusting entry of course related to property plan to equipment or fixed assets which will be the accumulated depreciation. Same concept here. We put the assets on the books when we buy them instead of expensing them even if paid cash because there's such large items that will be benefiting so much time frame into the future. And then we record an adjusting entry on a periodic type of basis so that we can record the allocation of the cost to an expense as we use the building. And then we have the liabilities down here. We've got the accounts payable typically fairly straightforward with the accounts payable. We could have a cutoff kind of issue in a similar way that we had with the receivable fairly straightforward with the credit card could be similar to cash in a lot of ways in that we might be putting the credit cards and helping with the credit cards by using the electronic transfers or the bank feeds. We'll talk more about bank feeds in the bank feed section and then we've got the sales tax which should be basically reported properly as we go forward if we're using the sales tax widget not normally needing an adjusting entry. We've got the loans payable. Now the loan payable often will need an adjusting entry as well if we're going to do like external reporting purposes or external reporting needs and possibly for tax returns if you have to put a balance sheet on the tax return. In other words if you're just recording like a sole proprietorship then you might not need the balance sheet items because there's not going to be a balance sheet on the Schedule C. You'll just have a Schedule C. But if you're an S corporation or something like that then you might have to put the balance sheet information on it and you might have to break out between short term and long term. So you've got that as an issue that you might need to be doing with this. You need to break them out between short term and long term and for that you need the amortization schedules. Also remember that if you're a bookkeeper you might try to say hey look I'm going to try to do this more on a cash basis and not even deal with the interest expense and just record the payments to the loan accounts and then ask the CPA firm to do all the adjustments including make the adjustment for the interest, make the adjustment to get the loan balance to agree with the amortization schedule and break out the short term and long term portion. So those are some of the things that will be broken out there and again you can see clearly kind of one of the differences between an internal use and external use here. On the internal use we're trying to basically enter this as efficiently as possible typically using one account so that we can tie it out possibly to the loan amortization table. And then when we have external use or when we have the adjusting process we want to break out that short term and long term portion so that we can more easily present it to get that added feature for decision making purposes. And then we've got the unearned revenue down here that we'll be dealing with. Now unearned revenue means we've got revenue that we haven't earned. Now usually in a book problem that means that revenue account will go up, unearned revenue account will go up and then we'll decrease the unearned revenue periodically would we have earned it. In our situation we have this situation where we had some negative accounts receivable that we'll talk about more in the future. But that adjustment is going to look a little bit different than you've learned from a book problem and the reason for it is kind of logistically but this concept is the same in that we're doing what works good for the accounting department and then we're making a periodic adjustment to make it more correct for reporting purposes periodically. Although it won't be as like pure of a adjusting entry that you normally see because we're not going to have a income statement account that will be impacted when we go through basically that scenario as we would with the traditional kind of scenario so we'll talk more about that later. So that's just a quick recap of some of those adjusting entries. Again if you're a bookkeeper and you're doing all of the accounting your goal might not be to basically do all these adjusting entries yourself but might be to work with the accounting firm and tell them exactly what you are doing and then let them do the adjusting entries based on whatever basis they're using cash basis accrual basis or the tax basis and then as long as you basically have a good setup between the two so the two people the two departments or the CPA firm and the accounting firm know what is going on then that system could work quite well. And the goal is to make the data input as fast as possible as as accurate and fast and have a system that is is designed for data input to be done efficiently and then the ability for the adjusting department to know exactly what is has been done and what they need to do to short up periodically or yearly and then if they do anything that's going to mess up the current accounting system that's when the reversing entries come into place then do a reversing entry for example when we break out the short term and long term portion of the loan payable. That's great for financial statement reporting purposes but it's going to mess up my reporting on the bookkeeping side the accounting side when I try to just enter transaction and tied to the amortization schedule. That's where the reversing entries come in to reverse it back to what's efficient for the accounting department. So the adjusting process should do what needs to be done to make the financial statements correct and reverse what needs to be done for those items that need reversing so that you can get back to the efficient accounting department data input. That's the goal that we'll be looking at. We'll take a look at some of the more common adjusting entries as we go.