 QuickBooks Online 2024, reversing entry accrued interest. Get ready and some coffee because we're sketching out the bookkeeping process outline with QuickBooks Online 2024. Here we are in our get great guitars 2024 QuickBooks Online sample company file. We set up a prior presentation opening the major financial statement reports as done every time. Reports on the left in the favorites, right-clicking that balance sheet to open link in a new tab, right-clicking the profit and loss to open link in a new tab, right-clicking the trial balance to do the same. Let's tab to the right, close up the hamburger and change the range. We're going from 010124 to 022924. Let's see a side-by-side on the months. If you please run it to refresh it tabbing to the right repeating the process hamburger, close that hamburger. We're going from 010124 tab, 022924 tab and then we're going to see it month-by-month. Run it to refreshing tabbing to the right and close the hamburger again one more time. We're going 010124 tab, 022924 tab, month-by-month on the breakout and refreshing the report. Let's go back to the balance sheet to recall what was done in a prior presentation. We're looking at the reversing entry now for the adjusting entry we did last time, adjusting entries being done at the end of the period to try to get the accounting system as close. First, a word from our sponsor. Yeah, actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us. But that's okay whatever because our merchandise is better than their stupid stuff anyways. Like this CPA thinking cap for example. CPA thinking CAP you see what we did with like with the letters and this CPA thinking cap is not just for CPAs either. Anyone can and should have at least one possibly multiple CPA thinking caps. Why? 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If we go down to the loans down below we can see that we had our loan payable in the liability area and we imagined that we had some interest that accrued that we had not yet paid which we then broke out to a liability. This would be similar. It's often easier to see I think for many people if it was like rent. If it was rent then if you basically were able to use the office building but you haven't yet paid for the office building then you have accrued the expense of rent expense even though you haven't paid it you'll pay it in a future point. Therefore you would have a basically a rent payable in that case. Same with the purchasing power of the money we had this $5,000 we used it for 15 days in this case haven't yet paid for it. Therefore we should be recording a payable and the related other side of it on the income statement being an expense which is in the interest expense account here. So we properly recorded that as of the cutoff date now so it's in before February 29th for the cutoff date. Now the question is will will this mess up my bookkeeper going forward because if I go back to my amortization schedule we're going to imagine the accountant the bookkeeper is going to be entering the transactions according to the amortization schedule. So let's give a quick recap of the separation of duties that you could make up for a bookkeeper and the year-end adjusting entries. Remembering the year-end adjusting entries although sometimes accountants can be a little bit snooty a little bit snobby possibly. It's not it's not like they're correcting an error right that's not the point of the adjusting process. Sometimes they can kind of sound like that right. Well we're going to make the financial statements correct as of the year end as if something was done wrong on the bookkeeping side and it isn't the case that the whole system was set up so that the bookkeeper does one bit that will be done as efficiently as possible and then the adjusting entries are done at the end of the period. So how can you separate those two duties. Notice that you could make the amortization schedule and then have the bookkeeper record the transactions according to the amortization schedule with each payment so that they would tie into the loan balance after each payment that is made. If you do that you still have to be breaking out between interest and principle. That's a little bit more difficult on the bookkeeper because they can't just memorize the transaction with the bank feeds and even then as we saw we still might end up with an adjusting entry that we could need for like the 15 days in this case that the payments in the middle of the month. So we still have like 15 days where we have interest which in this case is possibly immaterial but you can imagine a situation that it would be material and therefore possibly require an adjusting entry as we did here. Now another separation of duties would be saying hey look I'm just going to as the bookkeeper automate everything make things as simple as possible which would therefore be as cheap as possible you would think by waiting till everything clears the bank and with the bank feeds I will just record the payment to the loan balance account and knowing that I'm not properly recording the interest and then at the end of the year for tax preparation and or external reporting you CPA firm tax preparer create the amortization schedule break out the proper amount of interest for the period that has passed and do the accrual entry if you need to. Those are kind of the two major methods that you might use for separation of duties between the bookkeeper and the year end accounting process even if you're the same person that does both. Alright so let's also think about we're going to imagine though that the bookkeeper is going to enter the transactions according to this amortization schedule. So what would that mean? Let's imagine what happens when the bookkeeper does a transaction for this first payment. What are they going to do? Well the cash is going to go down that's often the easiest thing to think about. They're going to put credits as negatives. So I'm going to say that it's going to go down by that. That's a credit and then interest expense. Interest expense is going to be the expense of us like a rent expense. So it's going to be 145.83 and then the loan balance is going to go down. Loan balance is going to go down by I'll say negative sum of these two which is the 161899. So the debit's equal to credits. That's going to be the payment. They would record this with an expense form. Noting what's the problem with this so why is this difficult? Because the second time they pay 176482 same check amount but the breakout between interest and loan balance is different. That's why it's a little bit of a pain from the bookkeeping side even though the payment is routine and on a monthly basis. But let's imagine they're going to do that. They're going to change the interest each payment. But what if they have this loan payable on the books? If they're going to account for the loan payable as they do their first entry then it would look something like this. They'd have to say okay cash is still going to go down by this amount. But then we've got the loan payable that needs to come off the books. It's on the books as a liability so it's going to have to be a debit of the 7292. And then we're going to have the reduction in the that's going to be where that's the accrued interest. That's the interest payable. And then we have the loan payable that's going to come off the books for this amount. And then we're going to have the interest expense which should be the negative sum of these two which is 72. You see it like if they were to record it properly to reduce the loan payable it would be even a more complex journal entry. So the bottom line is we don't want to confuse them with this loan payable account. And we don't want to make it more difficult than just following the amortization schedule. Now you could probably do that and not have a problem by leaving it on there. I could say hey look don't do anything to that loan payable account just leave it there. And we will account for it again at the end of the next period at the end of the next month or year. And you just don't do anything with it and don't let it bother you. But if it bothers them or if they want to if they feel like they need to reverse it this would be more complex to reverse. Notice that this entry is actually correct though because what we should have is in the current period interest expense of 72.92 even though we're going to be paying interest of 145.83 Because 15 days of the interest should belong to the prior period in this case the prior month of February. That's why we had to do this journal entry to pull it into February. So how do we solve this? Well we did an adjusting entry to pull $75 into the prior period. So this is what we did. We did interest expense of $72 and then interest payable of $72 resulting in the credit of $72. That's the adjusting entry. Now we're just going to reverse it. A reversing entry I would keep everything the same and then just keep the top and the bottom the same so that you're not trying to put the debits on top and just reverse it exactly. So interest expense is now credited and then the interest payable is now debited. We're going to do this as of the first day of the following month which should look a little funny because now you're going to credit interest expense and that'll result in a negative expense in March. And that will look funny up until the point that this transaction this payment is recorded at which point they will over report the 145.83 of interest and this will net out against our interest expense netting to $72.92. So that seems kind of complex but it's not too let's show you what let me show you what I mean here in QuickBooks. So we're going to we're going to do a reversing entry reversing exactly the adjusting entry that we put in place the adjusting entry if we go back in here on the interest payable is this one. So here's the adjusting entry as of the end of the period if I go into it. We can see that we credited the interest payable and debit the interest expense so I'm just going to reverse that entirely because there's only new two accounts affected. I'll just basically do it with the register that might be an easier way to see it. So let's go to the transactions. I'm going to use the register which is the balance sheet side of the account because those are the ones that have a register for it. Interest expense will not. So I'm looking for the liabilities other current liabilities interest payable. So we'll go into the register and I want to make this go down as of the first day of the following period. So I'm going to hit the drop down journal entry and the point is it needs to be as of 030124 the first day of the following period. Now if this was a yearly adjusting entry we would make all adjusting entries 1231 December 31st all reversing entries 1 1 January 1st of the following year. In our case the cutoff is 229 the end of February the next day is 3 1. So again you might say well why do it that day you could be you could make it more exact because the payment is going to happen on 3 15. Why don't you make the reversing if entry on 3 15 and that way you won't have 15 days of a negative expense in March. And the reason is because we it'll be more confusing to know where the reversing entries are if we put them in the middle of the month. So we're trying to say I want all my adjusting entries as of the end of the period all my reversing entries as of the end of the period. I want to know that it is a reversing entry by the fact that it's reversing as of that period and will have a memo and it will be a journal entry form a form not typically used in the normal accounting process. So the memo is going to be a reversing entry you might want more detail than that but that should be like part of every reversing entry. So I can identify it as a reversing entry and this is going to be reversing. So it's just a decrease doing the opposite 72.92.92 and the other side is going to be going to the interest payable account interest payable. You probably do not want to set this account to be the same. Hold on a second. I'm in interest payable. You're right. That was I did that was wrong. Thank you. Thank you. So let me try this again. Oh, that was my wrong sound. I tried to do a sound board for an error thing. Maybe this is there it is. Okay, I'm working on my sound board. So this is going to be interest expense bear with me. It's going to be good. Once I learn where the keys are. So let's go ahead and enter it. And so then if I go into it. If I go into that one and edit it, we can see the journal entry and I can copy this reversing entry and put it on both sides. So interest payable now being debited interest expense credited, save and close. Let's check it out. Go into the balance sheet and then run it. So now I can see January and February. Let's add a month here. Let's go to 033124 and then run it. So now we've got March. And so let's go to my interest. It's a payable. So there's the there's us putting it on the books. And now it's gone again as of March. So it doesn't confuse the bookkeeper at the start of the next period. So if I go into it, then of course, we'll see it coming out here. So if I change the date going back to three going back to to 022924, then we can see the adjusting entry was made as of the prior period to make it correct as of the cutoff date. That's the only date we care about. And then it was reversed the day after so that we don't confuse the bookkeeper. So we're going to say, okay, that looks good. Let's go back. And then the other side, if I go to the income statement and I change the date once again to 033124, run it. And we go down to the interest expense. So now we have the interest expense at 66851, which includes the entry. And then it was reversed. Here's where it looks funny because if I run March just for just for March and you can imagine like if it was December 31. And I was starting January the next year with nothing in January. Similar concept. I would start off with a negative expense. Right. That's not right. Expenses only go up. You shouldn't have a negative expense. And that's true. It's wrong right now. It will be wrong for 15 days up until the point that the bookkeeper records this journal entry according to the amortization schedule, which will record 14583 of entry. Because that's how much interest was paid as of that date. But in actuality, only 15 days of it or a half of it should be applied to the current period. The other half to the prior period because that's when the actual interest was incurred. So once they record that, we'll be back to where we should be. Right. That's the idea. So you're going to end up with this funny reversing thing. We're still going to have a situation where the accountant or the bookkeeper is going to say, hey, look, there's a negative expense. That's funny. And we might still have to explain or we might have to still justify our position as to why that is a useful way to deal with this situation. But if I go into it, there it is. And then if we bring this back to the prior period, now we've got it went on the books as of the 29th into the prior period. And then we took it off the books for the first day in March. So that's how the process will work. So we're going to say exit and that is it. So now let's go to our journal reports just to see those journal reports. I'm going to go back into the hamburger and the reports on the left hand side and I'll type in journal report and then run it. So let's close up the hamburger and then here's my journal. I'm going to change the date now so we can run a journal report for the custom date of 022924 to 022924. This would be my adjusting entries. I'm going to filter it by transaction type, filtering by type boom boom equal to transaction type equal to journal entry. Let's type it in here journal. Okay. Now I lost it. Okay. So there it is. So there's our adjusting entry and we only have one adjusting entry. This one is still showing up because it's a payroll adjustment that we need to delete, which we can do by exporting it to Excel. And if I go up a day, this is the next day up. Why is it giving me this thing? Okay. So then there's our reversing entry. So we can easily identify the transactions due to the fact that they're on specific days adjusting entries as of the end of the month or the end of the period reversing entries as of the first day of the following period and because they're all journal entry forms, not the typical form for data input and because we put in the memo that they were either adjusting or reversing entries depending on whether they're adjusting or reversing entries. Okay. Let's go to the trial balance and see where we stand as of this point in time. When we look at the end of February, let's see if I can just make it go up to March now. We can say we can go from 03, 03, 31, 2, 4. And so March is going to give us an accumulated for March on the income statement. But you can check these February. The cutoff date should still be the same. And then in March, when we look at the interest payable, it's now back to zero. And then on the interest expense, it's a little bit more difficult to see because the March is showing the accumulated amount. But the interest in February is at the 180 and then the 180 March. Wait, that's the wrong amount. Interest expense. Here it is. That makes sense. So, $6,6851. And then the $595 cumulative because we reversed it back in March. So, if you're checking your numbers, this would be the best form to check out. This is, again, the reporting period that we're looking at. This is the adjustment that we made as of the first day of the following period so that the books are back in a situation that it could be as easy as possible to have the separation of duties between the bookkeeping process. the bookkeeping process and the adjusting process.