 QuickBooks Desktop 2023. Adjusting entries and reversing entries introduction. Let's do it within two-inch QuickBooks Desktop 2023. Support Accounting Instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Here we are in QuickBooks Desktop. Get great guitars practice file. We started up in a prior presentation. Going through the setup process we do every time. Maximize the home page to the gray area in the view drop-down. We've got the hide icon bar, open windows lists checked off, open windows open on the left. Reports drop-down, company and financial. Let's open up the profit and loss, the P and L. We're going to go for the first two months on the range change. 010123 to 022823 and then customize it. Fonting and numbering, changing to 14. OK. Yes and OK. Reports drop-down. Again, company and financial. This time the balance sheet. Customize it. We're going to change it from 010123 to 022823. Fonts and numbers changing the font. Bringing it up to 14. OK. Yes and OK. That's the setup process that we do every time. Now let's talk about adjusting and reversing entries. Adjusting entries being entered as of the end of the period. Whether that be the end of the month or the end of the year, reversing entries, reverse some of the adjusting entries and are typically entered the day after the end of the period, which would be the end of the month or the end of the year. Let's first think about why adjusting and reversing entries are used when you might use them for your own bookkeeping and when you might use them if you are a bookkeeper, for example, doing multiple clients. How can you set up a system that would then work well? Adjusting and reversing entries are typically accrual concepts that are designed to get our financial statements reported as accurately as possible as of the cutoff date, that being the end of the month or the end of the year. You might think that if you're smaller business and if you're on a cash-based system that you don't need adjusting or reversing entries and that's not necessarily the case, although you might have different or less adjusting and reversing entry requirements than, say, a publicly traded company, for example. For example, down here we know that property, plant and equipment, depreciable assets is one area where we have to deviate from a cash basis method to an accrual basis method because if nothing else, the tax code basically requires us to do that. So the first way to think about the accrual process is to think about large companies that are publicly traded, for example, and have to deal with regulations on how they report stuff such as generally accepted accounting principles as opposed to small companies that have to deal with, if nothing else, the tax code if you're in the United States. So if you're a large company, then generally accepted accounting principles usually require you to be on an accrual basis, and that means that as of the point in time that you're reporting your financial statements, you might have to make some adjustments to your profit and loss in terms of when you report your income and expenses. So most like classic adjusting entries have an income statement account, at least one income statement account, and at least one balance sheet account because they deal with timing to get the income and expenses reported in the proper period. Now, small companies might be on a cash-based method and you don't have to deal with generally accepted accounting principles. You don't have that same kind of requirement. And in some cases, you might be allowed to be on a cash-based method as opposed to an accrual method. In that case, the main purpose you're putting the financial statements together, at least from a regulatory standpoint, might be for taxes. You've got to fill out the taxes. If you're sole proprietorship, that'll just be a Schedule C. But you might have other requirements if you're some kind of corporation, S corporation or a partnership or LLC. So you're making your financial statements in order to deal with the tax code. Even the tax code, if you're going to try to put your financial statements on an essence of tax basis or one that you can use to, in essence, do your taxes as easy as possible, will require some adjustments, for example, as we saw with the depreciation. You also, as a small business, might have some requirements for reporting purposes to use an accrual basis, possibly if, for example, you have inventory, possibly from the tax code, and if you want to loan the bank, then might ask you to present your financial statements in whatever way the bank wants it in and possibly require you to have an audit or something like that. And in that case, you've got to conform to whatever the bank wants. And then, of course, on the internal side of things, just from a bookkeeping standpoint, the accrual method is typically thought to be more accurate than the cash method. That's why you have to deviate from the property, plant, and equipment, because if you report your expenses down here, let's run this income statement, for example, by month and say I'm going to hit the month dropdown. If I reported all the purchases of my equipment or my property, plant, and equipment in January, because I paid cash for like $100,000, then I couldn't really compare January to February. It's not a very fair comparison, because in reality, even if I paid cash for it, if I purchased a building, I'm going to use that for 30 years into the future. So for a comparative purpose, it doesn't really make sense to expense it. It doesn't really help in some ways, depending on the types of budgeting that we're going to do going forward. So the accrual concept was first come up with in order to have better reporting, so to have better internal reporting than you might want to be more on an accrual basis method. Now, the other thing to think about is, well, if I'm going to do these period end adjustments, when do I need to do them? Obviously, again, if you're a publicly traded company, you have to do it like every time you report, at least quarterly and monthly, right? But if you're a small business, then maybe you don't need to do them even monthly. Maybe you're going to say, I'm just going to wait till the end of the year and do the adjusting entries at that time, because that's when I'm going to report the financial statements, and that's when I need them for the taxes. So possibly you're saying, okay, I know there's some timing issues at the end of January and the end of February, but most of them wash out because they're just timing issues. They're reported in January instead of February, but I'm not going to worry about the cutoff too much until I get to the year-end cutoff, because that's when I'm going to report my taxes. That's when I need to really get things honed down to report the taxes. So for small companies, you might be more on a year-end kind of basis. So you might be using a cash-based method. You might be working with a CPA who at the end of the year can do the adjusting entries at the end of the year. And that's the next thing to think about who's going to do the adjusting entries. So I think it's often useful to think about these processes as two separate processes. You might be doing both adjusting entries and data input, but it's useful to think of them as separated. And you might have someone else doing the adjusting entries, possibly like a CPA firm or your accountant, for example. So the general idea is what we want to do is on the home page here, these represent the day-to-day transactions that we've been putting in place, these forms that build the financial statements. What we want to do on the accounting side is make the data input as easy as possible. When I run payroll, for example, I don't want to have to worry about the cutoff, the fact that the payroll is going to run over some days before the cutoff at the end of the month or a year and some days after the cutoff at the end of the month or a year. What I want to do is run payroll as easy as possible. It's complicated enough. I don't want to make it more complicated. And if there's any adjustment then that needs to be made, then I'd like to make that adjustment using a period-end adjustment. So that's the idea that we're going to use. On the bookkeeping side, I want to make the data input as easy as possible. I would like to make the data input so easy that I can hire someone to just do the data input without having to worry about any other stuff by setting up the forms and all that kind of stuff. That ease of data input will result in some cases where my timing is not perfect, such as the payroll, for example, and that means I'm going to have timing differences where I'm reporting the expenses not in the proper period. And I'm just going to adjust for that at the end of the month or year. Now, we're going to adjust it as of the end of February, and you might ask why didn't we do it at the end of January? We could have, but I'm just going to do it as of February because I want to give the example of what you would do. Many small businesses might not do this at all until the end of the year because that's when they're going to basically do their taxes. Larger businesses might do it monthly or quarterly because that's when they have to report their financial statements. So that's the general idea. So what I want to do as of the cutoff, which for us is going to be the end of February, is try to get our financial statements as best as possible, as correct as possible on whatever basis that we're going to be on. We will imagine an accrual basis, but the same concepts will be there for a cashed base system. And then after I get the financial statements correct as of the cutoff date, I want to reverse anything that's going to mess up my accounting department which are just related to timing differences because the accounting department is doing fine with what they're doing. It's just they need a little tweak at the end. That's how we designed the system to be. It's not an error. We're just doing the little tweaks that we're supposed to do at the end of the period to make things correct. So let's just look at some of these accounts and see which ones might need adjustment. Cash is usually not something that we need an adjustment for. So that when it is what it is, we've reconciled it to the bank rec. So that shouldn't be something that needs an adjustment. With the accounts receivable, we saw that we're going to need an adjustment which is a little bit unusual. This is a little bit uncharacteristic of a normal adjusting entry because we had some deposits that we put in here that resulted in negative receivables which really should be liabilities. And when we put those in place, we said, hey, look, what I'm going to do is make it easy on the bookkeeper by using the accounts receivable to track the advanced deposits instead of trying to record those as unearned revenue. And then we're just going to fix it at the end of the period which might be the end of the month which we will do or at the end of the year if there's any timing differences breaking out the accounts receivable, increasing it, and recording the liability. Now notice if you're sole proprietor reporting the Schedule C and you're just doing this for taxes, you don't even really need to do that particular adjusting entry because you're only going to be reporting the income statement on the tax return. But if you're reporting the full balance sheet, then you would generally want to have the liability broken out. And then the inventory, you might have to adjust that to the inventory count. We also could have accounts receivable adjustment because we've got the wrong timing, for example. And that might happen if, for example, I'm on a job cost system and I basically try to get my staff's time and for a month and then I bill out the month after. So for example, if they were doing the work last month and then I invoiced and the invoice doesn't go out, in our case, until March, but the work was actually done in February, even though the invoice was created in March, I should technically record the income when we earned it and the work was actually done in February. So that's another thing and that does have an impact on the profit and loss. That's a traditional adjusting entry. Inventory, we might have to do the physical count, for example, for the inventory to make any adjustments, see if there's any shrinkage or anything like that that we need to account for. Prepaid insurance. The prepaid insurance is a classic adjusting entry process because you'll recall when we put the prepaid insurance on the books as an asset, we did the accrual thing similar to what we did with the furniture and fixture. Instead of expensing it, we put it on the books as an asset and then monthly, which is what we're going to do or at the end of the second month, yearly, you can make the adjustment to record the expense. Now, again, if you have a small company and you're on a cash-based method, you might just expense it when you bought the insurance but you're going to end up with that lump sum in one month if you bought a year's worth of insurance. And then we've got the depreciation. This is a clear example of one that even a small business has to deal with and again, you might only deal with it yearly. What you're going to do with it is you're going to say, if I purchased large stuff, I've got to put it on the books as an asset. If I purchased a building, I can't just expense it even if I paid cash for it, even if I'm on a cash-based system, they're going to make me do an accrual thing. I've got to put it on the books as an asset and then most small businesses will work with their tax software or tax preparer to give them the adjustment and then you'll have to do adjusting entries for the accumulated depreciation. And then we've got the accounts payable and we've got the liabilities is another one, the, let's say the loan that we had. Where is it? The loans here. This one, we might have to break out the short-term and long-term portion of the loan and so we might set that up so we can break that out as well. Now, so those are just some examples of the items that we'll go through and make the adjustments for. Now, as we do this, if you're an accountant, what you want to do is say, what am I going to do on my side as the bookkeeper, whether you're doing your own books or whether you are a bookkeeper and what am I going to let the CPA firm do at the end of the period? Ideally, you would like a situation to say, hey, look, I'm going to make things as easy as possible because I'm doing the accounting side of things and maybe you have the CPA firm do the adjustments at the end of the period. And so you might want to, when we're going through these adjusting entries, for example, think about how you can do something as easily as possible just using bank feeds and making the data input automatic basically as easy as possible and then at the end of the year, possibly for small businesses, you give the information necessary such as loan documents, such as the purchases of large purchases and whatnot to your CPA firm or possibly you do it yourself at the end of the year and then just do the adjustments that are necessary periodically basically at the end of the year. That's how you kind of want to think of it from a bookkeeping standpoint. Logistically, you're thinking, who's going to do what, right? The accounting department data input or when I'm doing the data input, I want to make that as easy as possible. When I put my adjusting entry hat on or when I work with my CPA, whoever my group of team is that I'm working with to do this stuff, I want them to do the adjusting entry process and I want them to do the initial statements to do what I need to do, which means at least report the taxes, report possibly in a bookkeeping system that makes sense for my decision-making process and any other reporting that is necessary possibly for a loan or any other kind of requirements and then reverse it or fix it, make it go back to the easiest process possible for my bookkeeping, right? Don't mess me up with the adjusting entries. Do the adjusting entries up my bookkeeping. So we'll talk about that on those concepts. As we go through these line items one by one, you can look at some of these balance sheet accounts and just think about which ones might need adjustments and why. Those are the ones you want to focus in on payrolls, another one. Those are the ones you want to focus in on when you set up your bookkeeping system to think about who's going to do what, how can I make this logistically as easy as possible? What are the needs of the company? What are the taxes need? Do they have other reporting needs? Are we on a cash basis or a cruel basis? And then you could set up your system as easy as possible. Notice that if you're a bookkeeper too it makes it easier to pick up clients that are in a specialized area. So if you're in a system where you're saying I specialize in smaller businesses that are sole proprietorships and I work with a designated CPA or a tax preparer who knows how I do stuff and possibly I work with a designated payroll provider so I have a whole system set up for that type of business and then you might specialize in that type of business. Otherwise when you're widening things out obviously you're going to have to recreate the wheel with every business so you've got to think about where am I specializing in can I just scale what I'm doing or do I want to have a wider net with a whole bunch of different clients and do different stuff and then network with the people that can fill the gaps, CPA firms and tax firms and payroll providers if you're doing payroll outside of QuickBooks. Okay so we'll go through each of these one by one.