 QuickBooks Online 2023. Adjusting entry, prepaid insurance. Get ready to start moving on up with QuickBooks Online 2023. Here we are in our Get Great Guitars practice file. We started up in a prior presentation using the 30-day free trial. We also have open the free QuickBooks Online sample company. You can have the two open at the same time by using the Incognito. 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. Or another browser. You can open Incognito if using Google Chrome, selecting the three dots in the browser Incognito, typing into the search engine, QuickBooks Online Test Drive. We're going to use the sample company to compare the accounting view, the one get great guitars is in, and the business view, the one the sample company is in. You can toggle between the two by going to the cog up top, switch the view down below. Duplicating some tabs to put reports in like we do every time. Right click on the tab up top to duplicate it. And then we'll duplicate that duplication process, right clicking to duplicate back to the tab to the middle. We want to open the reports on the left, looking at the balance sheet report. By the way, if you're in the business view, where are the reports that are in the business overview, of course, and then the reports. So you can check it out in the business view to tab to the right. We're going to go down to the reports on the left. This time opening up the profit and loss, the P and the L close in the hand buggy. And we're going to change that range going from 010123 to 022823. Let's see it on a side by side hitting the drop down. We want the months to be showing on the side by side. So we have Jan, Feb, and the tote the year to date closing the or going to the tab to the left. Then close the hand buggy. And then yes, that range, it needs to change 010123 to 022823 hitting the drop down, putting it into the months and run it again to refresh it. There's the Jan, there's the Feb. We're doing adjusting entries as of the cutoff date to 028 and justing entries all entered as of the end of the period. You will recall this time we're looking at the prepaid adjusting entry, the most common example being prepaid insurance. Now just to introduce the concept here, let's first look at the most extreme example that's similar to prepaid insurance, which we'll talk about in more detail because it has its own kind of quirks to it as well. That being the furniture and fixture or the fixed assets, the depreciable assets. So you might think that you're going to be on a cash to base system and by being on a cash based system and being possibly a small business, you can just stay away from all this accrual business and therefore stay away from like the adjusting entries in general. But there are some areas where you just can't do that. You still have to deal with adjusting entries, possibly for other reasons than a standard, like a cruel adjusting entry with a timing difference, like a payroll situation, or you might have a situation where you still have to do an accrual thing, even though you're trying to be on a cash based system, possibly because the tax code requires you to do it or something like that. And the furniture and fixture is the or the fixed assets. The example of furniture and fixture being a fixed asset is one of the most extreme examples, because if you buy a building, if you buy equipment, if you buy a car, even if you pay cash for it, and you just expense it in say January, then you'd have this big car expense in January. And when you compare January to February to look at the performance, it would look like January. You did really bad compared to February, but you didn't really, which you did was invest in a car that's going to help you generate revenue into multiple periods in the future. And that's why because that's such a big timing difference between a cash and accrual basis, and the accrual basis is a better basis for that kind of comparison, we're forced to put it on the books as an asset. So most people probably wouldn't put it that way, but they kind of just think in their mind, okay, I'm buying a building, that's an asset, it's not an expense. Why? Because of timing difference, because you're doing an accrual concept. Now, because these property planting equipments are big items, and they're like unique in nature, no two buildings are the same. Once you use equipment, it's going to depreciate, it's going to go down in value at different rates, you're not actually consuming the building in that the building's going to go down in units, you have one unit of building. So that's why we have to use an estimate, or that's one reason for using an estimate of accumulated depreciation to figure out the decrease. That's why we have this contra asset account. Now, a similar concept and you depreciate it, that's when you actually allocate the cost to the income statement with depreciation. We'll talk more about how to do that in the future. We have a similar problem with something like a prepaid account such as prepaid insurance. Insurance is one of those things that you pay for it before you get the coverage by definition. Now, if you pay for it every month, even though you pay for it before you get the coverage, unlike a telephone bill where you pay for it after you get the coverage, because you're paying monthly, it might still be pretty easy to kind of just record it each month as an expense. But if you pay for a whole year in advance, then you start getting this big distortion again between when you paid the bill. You can see it on the income statement, if I had a $12,000 expense in January, and then I compare January to February, January would look much worse. And it's not really fair for January to look worse, because the insurance was paid and will be covering will be benefiting multiple periods into the future. Therefore, we would want to do this kind of a cruel concept thing. Now note that doing the accrual thing as opposed to the cash thing is more difficult. It takes more steps. So if it's an irrelevant change, then possibly doing a cash based system would be the easy kind of thing to do oftentimes. And so with the insurance, you got to kind of make a call, you got to talk to your accountant in terms of how you're going to deal with these kind of prepaid accounts. Insurance is the most common example, but you could prepay anything. You can imagine going to having a business deal with your landlord who's given you the business office building and then asking them if you can prepay the rent in advance in exchange for some kind of discount or something like that. And if that was the case, then you might have prepaid rent. You paid for a whole years of rent up front, right? And that would be more common in a business kind of deal where arrangements like that might happen than renting a personal apartment or something like that. So if you're going to deal with prepaid insurance and do it on an accrual basis method, then you're going to want to put it on the books when you buy it as an asset, as opposed to an expense. And that's the thing that you have to kind of set up in advance. What am I going to do with the prepaid insurance from the bookkeeping side versus the adjusting entry side of things? You want to separate your mind into two separate categories with those kind of categorizations. And you could, and then you can try to automate your system. So from the bookkeeping side of things, from the accounting side of things, as I pay the insurance bill, I would like to automate the pain of the insurance bill, possibly doing it through the bank feeds to make it as easy and automated as possible. So then the question, do I automate it always going to an expense account, which you can do if you're just going to be in a cash-based system and possibly at the end of the year, the accountant might be able to take it out of the cash account if they need to do an accrual adjusting entry and record the prepaid portion of it. But that's not really the natural thing to do if you're going to do an adjusting entry. The natural thing to do if you're doing adjusting entry is to record it whenever you pay the insurance as an asset of prepaid insurance. And you can set that up just as easily as you can set up making it an expense by just always going to an asset account instead of an expense whenever you pay the insurance company. The reason we typically put it into prepaid insurance rather than an expense is that it makes it easier for us to do the adjusting process. And it's more correct when we put it on the books. We put it on the books as prepayment and then we expense it as we consume it. But also you might say, well, why don't I just expense it like I do with everything else? And then I make an adjusting entry or my tax preparer makes an adjusting entry. Another reason that's more complicated is because the income statement closes out to the equity section at the end of the period. Whereas the balance sheet accounts are permanent accounts, they don't close out. So it kind of puts another kind of wrinkle in the equation when you've got it on the income statement side of things if you're trying to do an adjusting entry at the end of the period to figure out how much of it should be prepaid as opposed to an expense. So the easy way to do it if you're working with your accountant again would be to say, you might set up a system and say, here's my insurance accounts. You might have multiple insurance accounts. You might break out your insurance by liability insurance, auto insurance or whatever other insurances you have and then keep your insurance statements so that you can provide those to your accountant at the end of the year. And if they need to do an adjusting entry to break out the asset portion and the expense portion, then they can do that on a periodic basis. And that allows you to just record everything to one account, automating it on a cash with a cash based system in that you're taking it from the register as you pay it with the bank feeds possibly and then just make an adjusting entry. Although you're doing an accrual thing with like a cash based system in that you're taking the information directly from the bank when you pay it, recording it not as an expense, which would be the cash based system thing to do versus accrual based, but putting it on the books as an asset, letting the accountant do the adjusting entry at the end of the period. So in our case, just for example, problem purposes, we put it on the books here a 12,000 imagining that that was that was for a 12 month time period. So now we're just going to say that that the policy started in February, let's say the policy started in February. And now we're going to allocate 1000 for the first month only February, we're going to say has passed. So one month has passed 12,000 is for 12 months. So 12,000 divided by divided by 12 is 1000 a month that we're going to allocate. So we're going to consume 1000. We're not going to have it. We're going to decrease the prepaid insurance directly, not having a contra asset account. The reason we don't have a contra asset account is because we know exactly how much has been consumed as opposed to a building where we don't know how much is consumed. We just basically have to allocate the cost based on an estimate of the value of the building or the car or something like that. All right, so it's going to decrease prepaid insurance. The other side is going to go to insurance expense classic adjusting type of entry. So let's go to the first tab. We could do this with a journal entry with a new and a journal, but because there's only two accounts affected, then we can use the register. So let's do that because the register is an easy thing to do. So we're going to go over to the accounting on the left hand side. Remember that if you're in the business view, by the way, the registers in the bookkeeping, the bookkeeping tab, and then the chart of accounts. That's where we're going. That's where we're headed. Okay. And then back on over, there's our chart of accounts. Now the expense account isn't something I can use because it doesn't have a register. So I have to use the balance sheet account. If I'm going to use this register approach and the balance sheet account is going to be prepaid insurance. So there it is prepaid insurance. And I'm just going to use the register and I'm going to enter all of my transactions. This is going to be a journal entry format journal entry. All of the transactions are as 022823 for an adjusting entry. I'm not going to put anything in for the payee and the memo. I'm just going to put ADJ entry. Now you might put more than that. You might say that you put the term of the policy term dates on when the coverage is covered that might help you with the calculation. So you could put the calculation there. But at the very least, we want to indicate that it's an adjusting entry so that the accounting department and us can know that that's something that was done on the adjusting side of things. It's going to be a decrease of a thousand dollars. And the other side, we're going to have to choose an account. I haven't put anything to the insurance account yet. So I'm going to just type in insurance and see what they have. And this is what they have. They've got insurance and then they put in subcategories business insurance, liability insurance, property insurance, rental insurance. This is probably a fairly good setup to be using with the insurance to have a parent account of insurance and the different kinds of insurance. If you only have one kind of insurance like business insurance, then you can just put it into the insurance expense account itself possibly. And it still gets a little bit tricky even with insurance because some insurances could fall somewhere else like an auto insurance possibly you might put under the subcategory of auto expense, or you can put it under the subcategory of insurance. So I'll pick maybe a liability insurance here. Let's pick that one that we're practicing with. It should be 1000, not 10000, 1000, not 10000. Okay. So that should do it. And so let's save it. Boom. And then let's go to the balance sheet and see what happens. K-Passo. We're going to go down to the prepaid insurance has now moved down to 11,000. That makes sense because now if one month has passed, there was 12,000 for 12 months divided by 12, 1000 a month, 11 months have not yet expired. Therefore 1000 times 11 is 11,000. That's how much of the insurance policy value that we're still going to be consuming in the future. If I go into this, that takes us to our journal report, doesn't take us back to the register, takes us to the good old journal entry. I'm going to copy the adjusting entry down here too. So we have it on both lines. Save it and close it. There we go. And then the other side back to the balance sheet is on the income statement. Let's run it to refresh it and then down here we have now our expense has been allocated. I would assume there it is. Insurance liability, thousand dollar insurance has been allocated. So there we have that. So that looks good. And so just remember that you want to make sure whatever system you're using, you're in conjunction with like the CPA or accountant, what you don't want to have happen, for example, is you have a schedule C business, for example, and you record your information as prepaid insurance, thinking that your accountant is going to make the adjusting entries at the end of the period and then they don't. They just take your income statement and plug it into the tax return without doing any other kind of thought process involved. Because what you want to do is if you're working with an accountant when you have a business, oftentimes that's going to help you possibly to do those period and adjusting entries, double check things like the payroll and possibly help you with the adjusting entries for any kind of prepayment accounts, especially like insurance and see what's going to be relevant on a tax return type of situation, rather than just, you know, taking just taking the income statement and whatever you give them and plug it in to the system. If you're working with someone that's just taking the income statement and plug it into the system, then you got to make sure that you're doing the periodic adjustments at the end of the period. And you still might use the same system. You just want to make sure that whatever system you're using and whoever you're working with to do that system and implement it, everybody has is in the loop on what needs to be done. Okay, so let's open up our reports, right click, duplicate our tab over here. And we've got our journal reports. Let's take a look at those first, scrolling down, reports on the left, closing the hand boogie, typing in journal, the journal. And let's go from 022823 to 022823. And then I'm just going to search for the journal entries by customize and filters and transaction type. We want the journal entry run it. So there we have it. So these are the adjusting entries we've done thus far. This is the one we just did here. These two are not adjusting entries. We would have to delete them. Maybe we'll do that and show you how to do that at the end by just exporting it to Excel possibly and removing them in Excel. And then if I take this up one notch, there's where we are with the reversing entries. Note that the entry we just did here is not a reversing entry. It's a permanent kind of process. So it's not something that we're going to say, hey, the accounting department is doing their thing, but we need to make a temporary adjustment. It's a planned adjustment, which is a permanent adjustment as opposed to a temporary adjustment. So next year, we'll have to do the next one allocating the expenses as time passes. So that's the other thing we got to keep in mind, which of the entries that we're putting in place are reversing entries and which of the entries are permanent. And this happens to be a permanent one. So let's open up the hand boogie and go to the reports again, open the trustee trial balance. Let's just type it in here. Why am I searching? I'm not going to go way down because they put it at the bottom. They're not nice to the trial balance. They put it way at the bottom. I don't like that. Trial balance deserves to be up towards the top. You can put it as a favorite, but whatever. 03, 31, 2, 3. Let's do the three. I'm going to see month by month, side by side. Remember on the trial balance that even though we're doing it three months, the side by side, the income statement accounts down here are usually the year to date income statement amounts because of the way the trial balance works. I won't go into that in detail, but this is what we have so far. So we're focused in on the, on the, on the period end of February 228 is our cutoff date. If your numbers tie out to these numbers, then we're on the same page. And hopefully that page is a good place to be at the end. We will do another journal report, which hopefully can help drill down on any differences.