 Zero Accounting Software 2023 Adjusting Entry Related to Accounts Receivable, Sales, or Revenue. Get ready to become an Accounting Hero with Zero 2023. First, a word from our sponsor. Well, actually these are just items that we picked from the YouTube Shopping Affiliate Program, but that's actually good for you because these aren't things that were just given to us from some large corporation which we don't even use in exchange for us selling them to you. These are things that we actually researched, purchased, and used ourselves. Focusrite Scarlett Solo 3rd Gen USB Interface with Software Suite. I've been using a Focusrite for years for my audio needs before which time I had a USB microphone which plugged directly into the computer, but I think you'll find as I have found, if you want to increase the quality of your microphone, you will need an interface and the Focusrite is the go-to interface as far as I'm concerned. I've been using this for years now. It works well. It's easy to use. It seems quite durably built because I only do the screen recordings. I only need the one solo interface. However, if you have multiple microphones you need to plug in or if you have other instruments you need to plug in, you can look at a similar model that has more input ports. If you would like a commercial-free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com where we have many different courses. You can purchase one at a time or have a subscription model giving you access to all the courses. Courses which are well-organized have other resources like Excel files and PDF files to download and no commercials. Here we are in our Custom Zero homepage. Going into the company file we set up in a prior presentation, get great guitars. We're going to duplicate some tabs to put reports in like we do every time. Right-click in the tab up top so we can duplicate it. Right-click in the tab up top again so we can duplicate it again. Back to the tab to the middle. Accounting drop-down. We're opening up a balance sheet report. This is a comparative balance sheet. If you don't have a comparative one you can open the standard. Tab into the right. Accounting drop-down. Income statement. We're looking at the comparative income statement. Again, if you don't have the comparative one open the standard. Tab into the left. We have our three dates as of a point in time. The end of January, the end of February and the end of March. Our adjusting entries are going to be as of the end of February being entered on February 28. That being the cutoff date. Any reversing entries will be on the first day of the following month, the first day of March. So our focus now is on this middle column, February 28. We're looking at the accounts receivable noting that accounts receivable typically goes up when we issue an invoice. So the timing issues with regards to accounts receivable are going to be when do we recognize the revenue? The revenue is usually recognized when we create an invoice. So to see that in a little bit more detail and why we might have a problem with it, let's go on to our flow chart noting that this is just a flow chart from the QuickBooks desktop home page. But we're only looking at it because it shows us a nice flow of forms, which will be the same kind of process for any kind of accounting system generally. We're looking at the revenue cycle or the sales cycle, remembering that if we issue invoices, that's the form that's going to be increased in accounts receivable. That's the form that's on a cruel type of form because we haven't yet collected the cash, but we're going to record the revenue when we issue the invoice. And that's usually in pretty good alignment with the accrual concept because we usually issue the invoice after we did the work, right? We did the work and so we're going to issue the invoice after the work was done, even though we have not yet been paid and on a revenue recognition accrual principle, that's when we should record it because we should record revenue when we have earned it, even if we have not yet received cash at that point in time. However, it's not a perfect system because you can imagine situations where someone entered the invoice and it doesn't line up to when the work was actually done. And in the normal flow of accounting processes, it's often the case where the invoice might be entered after the timeframe when the work was done. So for example, we might have the invoice that was entered in our case in March, even though the work was done in February. So from a revenue recognition principle, we should have the revenue recognized in February, but it's being recognized in March because that's when the invoice was made. Why might that happen? Well, for example, if you're in a job cost kind of system, for example, a accounting firm or a law firm, you might have to get all the information and time from your staff in order to see who worked on what job and then go through your billing or invoicing process based on that information. You might only do that every two weeks or every month, for example. And if that's the case, then it's quite possible that the work was done in February, but you didn't compile all the time and create the invoice until March. And that's when you might have this timing issue. So technically, what should happen is we should pull the revenue that you recognized in March to the time period when the work was done in this case in February. So that's the general kind of scenario. And remember, when you're talking about someone that is going to try to manipulate their financial statements, they often try to manipulate with these timing issues, meaning try to push the invoice artificially over the timeframe if they're trying to lower their income so that they pay less taxes or they're trying to increase their income so they look better to get a loan. They might try to pull an invoice if they're trying to increase their income from the next period into the current period or if they're trying to lower their income, they might try to push an invoice. So you could have intentional problems as well from an auditing perspective, but from just a normal adjusting entry perspective, you can have just a normal accounting system, which is perfectly fine. The billing cycle is every two weeks. I'm not going to mess with that. What I want to do, however, is make an adjustment periodically if I need to in order to shore up this timing problem that's happening with our normal kind of billing cycle. Now, I'm going to make it a little bit more complex and add inventory to it so that we have to deal with the inventory as well, just to make the journal entry a little bit more complex of a transaction so that we can add the tracking of inventory. So to see what we're doing here, I'm actually going to enter an invoice as of March and pretend that that was entered into our system and then we'll see how we're going to proceed to do an adjusting entry for. So let's go to the first tab. I'm just going to make a normal invoice. This is not an adjusting entry. This is a normal invoice that we're imagining happened after the cutoff date for work that was actually done before the cutoff date. We're going to say this is for Anderson guitars. I'm going to say that this happened on March 5th, let's say, but the work was done. We're going to imagine before the cutoff before February and the due date. Well, let's just tab through it. It'll populate and we're going to say this is an ELP guitar. An ELP guitar and we're just going to sell one of those. It's subject to tax. It's a normal invoice. What's this going to do? It's going to increase the accounts receivable by 525. The other side is going to go to revenue, but only for the 500. And then the sales tax is going to increase sales tax payable. And then the inventory is going to go down by an amount not on the invoice, but driven by the item and the cost of goods sold is going to go up. The net impact on the income statement increase of 500 minus the cost of goods sold. The sub ledger for accounts receivable will also be impacted tracking by customer Anderson guitars and the inventory will be impacted tracking the inventory by unit as well as dollar amount. The only problem is that it's happening after the cutoff date and the actual work we're imagining was done before the cutoff date. In this case, it would usually be the shipping or delivery of the inventory. That's when our work is done if inventory is involved. So let's go ahead and approve it and just double check that that's what happens. Let's go to the balance sheet. We can update the balance sheet and I can see that we should have in March. We've got accounts receivable. If I go into the A to the R accounts receivable scrolling down, it's going to go up in March for the 525 the full amount. That looks correct. The bound the income statement. If I go to the income statement went up by 500. That looks correct and then back on over the liability for the sales tax. Sales tax is going to be the difference is going to increase the the sales tax. I won't go into it, but that's where it is and then the other side is inventory. Inventory is going to go down inventory. If I go into inventory, it's going to go down. So if I go into that, we're going to say inventory went down by the 400. Okay, back on over the cost of goods sold went up by 400 net impact on net income. The 500 revenue minus the 400. So the 100 is the actual change that happened and we have sub ledgers that we have to deal with. Now these are important. I want to point them out because when we do it on an adjusting entry, we have to deal with these two sub ledgers. And if we don't deal with them properly, we would throw off the sub ledger so it no longer matches what's on the balance sheet. So we have to be very mindful of that. Zero will possibly force us to be mindful of that at least with the accounts receivable. Let's right click and duplicate just so you can see what I'm talking about. And we're going to go to accounting drop down reports and let's open a sub ledger for the accounts receivable. I'm going to open up the account the aged receivable summary. Let's open that up. And so there we have this one and it should be as of let's say 228 as of the cutoff date. Let's say 228. Boom. And now we're breaking out our receivable by who owes us the money. So receivable broken out. I'm not really looking at the ranges here. I'm just looking at the totals adds up to the 2262650 that ties out to 2262650. If I try to enter a journal entry that isn't tied to a customer that is impacting accounts receivable, then it would throw that sub ledger off. So zero will usually force us to have a customer entered when we're posting something to accounts receivable to try to not allow us to throw that off. Let's open up the other one sub ledger for the inventory, which is the other one we have to be quite careful of and the one that possibly you could throw off. If you post a journal entry to inventory that doesn't have an item that you're tracking when you're doing when you're tracking perpetual inventories. So let's go into our reports on that one and type in inventory inventory item list. And this is the report because we're tracking inventory on a perpetual inventory system in room. Remember that you don't necessarily have to be tracking inventory on a perpetual inventory system. You might be tracking it in some other method. But if you're tracking it within zero, you got to make sure that this number, of course, the total inventory, which shows the units and then the dollar amount. 4944 should tie out to what's on our balance sheet over here. Is that my balance sheet for inventory, which is the here it is. I was looking at the 4944. So that ties out and that's correct. Now, when we make the adjustment, we have to be careful and mindful of that. So now what I want to do is I want to say, OK, I need to pull that that income here on the income statement into February. It needs to be pulled into February. Now, one way you might do that is you might say, well, I'm just going to go into the invoice and I'm going to change the date on the invoice so that it pulls it in before the cutoff. You could do that. That's like the easiest thing to do. But you don't normally want to do that because again, the point of the adjusting entries is I don't want to throw out if the normal billing cycle is correct. They do it every two weeks. They do their billing cycle every two weeks. Then I don't really want to throw off the accounting cycle. I don't want them to say, oh, what happened here? My billing cycle is wrong and the invoice went somewhere else. And the invoice could also be connected to when the payments happened. And if you change the date of the invoice, then it might change the due date of when the payment is due and it might look like the payment is going to be late and that kind of stuff because it's connected to the payment. So usually you don't want to change the date. What we want to do is make an adjusting entry to pull this information to February. If I do that, I will basically have recorded the income twice as of March, right? But I will have to be correct as of the end of February. It will be in there twice as of March 3rd or 5th whenever we recorded it. So we're going to have to do a reversing entry. So this is one where we have to adjust an entry and a reversing entry. Now, this is a fairly complex transaction. So a lot of times it's helpful to just map out the transaction in Excel in debits and credits. And then we'll enter it into the system. So I'm just going to open up Excel and just think through this transaction. I'm going to right click on the whole sheet format my Excel sheet to currency bracketed dollar sign gone. Okay, I'm going to make it a little bit larger here. All right, so then let's just think about the journal entry. So I'm going to say this is going to be the description or accounts. Let's say and then we've got debits credits. We almost have to deal with debits and credits. I'm going to select the whole thing and make it bolden. And I'll make this a header by going home tab font group black and white. And then I like to center these two maybe center these. Okay, so we so we almost have to deal with debits and credits here. So we're going to say what's going to happen when I when I make an invoice. What happens accounts receivable? I'm just going to abbreviate with AR is going to go up. I know that happens and then the sales or revenue account is going to go up. Now sales goes up with a credit, which I'm going to report or show as a negative number. I know that we sell the inventory for $500 and then there's going to be sales tax. If sales tax is impacted sales tax payable a liability account, which I can calculate. I'm going to say this is going to be equal to the 500 times 1.05. Meaning there's 5% sales tax plus one or 100% of the 500 100 and 5% for the sales tax. Oh, hold on a second. That's not right. I'm going to say this times 0.05 5% 25 and then 105% is the accounts receivable, which I'm going to say negative sum, which is going to take these and flip the sign. So now I'm summing these up 525 and flipping the sign. So it's a debit. So the debits minus the credits equals zero, which is kind of nice format. That's why I put the negatives on the credits, which I think is quite useful. So I'm going to say, okay, let's put some brackets around this. And then we also have cost of goods sold, cost of goods sold, COGS, some people like to call it COGS. I never used to call it that, but I hear it so often this inventory. We're not selling COGS. That's just what they call it. Okay, so there it is. So we have that. Now there's two accounts here. That's going to be the journal entry. So I could just enter a journal entry for this to make the financial statements correct as of the cutoff date and then reverse it after the first day of the following period for the reversing entry. But there's a problem. And that one problem is that this accounts receivable account has a sub ledger. So I'm kind of skeptical about that account and inventory has a sub ledger. So if I record something with a journal entry to accounts receivable, that could look kind of ugly because then it's going to show up. Then it's not going to, if Zero let me record something to accounts receivable without a sub ledger, then the sub ledger generated report would not tie out to what's on the balance sheet. Zero will normally not let us do that, which means we're going to have to add a customer. Which is going to be Anderson. I'm going to say this is Anderson is the customer, Anderson. So now I could add the customer possibly with the journal entry, but that also causes a problem because, because what's going to happen with the sub ledger, that means that the Anderson journal entry might pull into the sub ledger bookkeeping stuff. And I don't really want it to do that. So it's kind of good that zero forces us to add customers so that the sub ledger doesn't get thrown off, but it's actually bad for adjusting entries because I don't want to mess up the internal reporting for the particular customer of Anderson. So you might actually create another customer, one way to deal with this, like call it just ZZZ customer, so that the data in the ZZZ customer will show up at the bottom of the customer list. Or you might create another account for accounts receivable calling it something or not creating it as an accounts receivable type account, but rather just an other current asset account so that it will not force you to have a sub ledger. So let me show you what I mean if I go back on over here and say, okay, I'm just going to do this journal entry. I'm going to do it with a journal entry accounting drop down and I'm going to say we're going to make reports and we're going to do a journal and I'm going to go into the journal report and go into that. And then I'm going to make an adjusting journal entry. So I can say adjusting journal entry. This is going to be, I'm just going to call it ADJ, ADJ entry, adjusting entry. You could put more detail than that, but that would be the minimum that you would want. It's an adjusting entry and therefore it's going to be as of the end of the cutoff date, which is Feb 28 for us. Now it has this cool reversing thing. And this is going to be one that needs a reversing entry, but we're going to do it separately so that we can analyze why we would need an adjustment of reversing entry. So we'll do that in a future presentation. Description. So if I just enter this in, it's going to go, okay, accounts receivable. Accounts receivable. It's not even let me post to accounts receivable in here. You see that and zero. So zero is actually even more strict in this than other software like QuickBooks. Like a QuickBooks, for example, will let you post a journal entry to accounts receivable, but it makes you put in a customer. And here the journal entry doesn't even have an accounts receivable account. So zero is basically saying I'm not going to let you record something unnatural to the accounts receivable. It's only going to go up with invoices. Okay. So we're going to say, well, how am I going to make an adjusting entry? Well, we could make another account that will be an accounts receivable adjusting entry account. So I could add an account and say, what's the account code going to be? I didn't look at the code. Let me do that again. I'm going to go into here just so I can look at the code for the assets. So let's say this is going to be, I'm going to try to put it somewhere where the accounts receivable. Let's make it 1380, let's say. So I'm going to say, all right, let's make another account, new account 131380, drop down. And it's going to be a current asset. It's not going to be an accounts receivable type of account, but rather an other current asset. And therefore it doesn't need the special treatment of tracking a sub ledger within it. So then I'm going to say the name is going to be accounts receivable, receivable adjusting account. I'm going to call it. And then so I'll save it. All right. So there we have it. And then I'm going to go and say that was 525. So that's 525. And then we're going to have a credit to sales. So sales is not a problem. We can post to that one. It's going to be a credit of 500. And then we have sales tax payable. Now sales tax payable or sales tax here, that's a liability account. That's another one that's a little bit messy because you have to track the sales tax payable, but we shouldn't have the same kind of issue with it. And then you've got cost of goods sold, cost of goods sold. And that was for 400, I believe. 400. And then you've got inventory. Now here's the other one where zero might not let us post to inventory, right? So if I go, if I go down here, we don't see, we have the inventory adjustment account, but zero is once again saying, hey, look, inventory, you are tracking it on a perpetual inventory method. And if you do not assign an item to inventory, you're going to throw off the sub ledger. So they're not letting us post to inventory. So once again, we can say, okay, that's probably good that zero is doing that, but it kind of messes up our adjusting entries. I was going to reverse it, you know, so it wouldn't even have been a problem zero, but okay. So then we can make another account. Now I already made one here because we had an issue before, but if you didn't make an account, you can do the same thing, inventory adjustment type of account as an other current asset type of account, which doesn't have the special need of tracking the inventory by unit with the sub ledger. And then you can put your adjusting entry here. So there it is. So there it is. Okay, cool. So now let's go ahead and record it and see what happens. Let's post it and we can see what happens. So I'm going to go to the balance sheet and let's update this thing. So now we've got an increase to the accounts receivable, but I didn't record it to here instead making this adjustment account. Now normally with zero, you can actually customize the formatting possibly to put these two next to each other, even though they're actually two different account types because of the flexibility of zero's reporting capacity, which is really pretty cool and more flexible than other software like QuickBooks Online. So we might test that out in a second, but the other side is going to go to the income statement. So if I go to the income statement, then we've got our revenue should have going up here. So now if I go into February, we've got the revenue going up hopefully, hopefully. So if I go down, we've got the revenue $500. So notice $500 is there. We pulled the $500 in to before the cutoff date with the journal entry, but it's also recorded here. So it's recorded twice as of March, which means we're going to have to do a reversing entry. So that's not the case, but we needed to pull it into here. That's the point. And then the difference is going into the sales tax payable. So sales tax payable account is down here and it's going into the sales tax. So it's going to go into here. Well, let's go into it and check it out. And so we'll say scrolling down to the sales tax. We've got that one entered and notice it's entered with a journal entry instead of, you know, the other types of transactions like sales transactions impacting money, informs or invoice forms. And then we've got the inventory going down, but I didn't record it to the inventory account because Xero wouldn't let me and probably for good reason instead recording it to the adjusting account. So that means that my inventory account over here is still going to tie into the inventory account that wasn't our adjustment account, right? So if I go over here and I make this, if I make this as of the end of February, February 28, and we check it out. Now I have 5355, first tab, 5355, 5344, 5344 right there. But we made the adjustment to another, a separate account. That's pretty good. And then the cost of goods sold is the other side. We recorded the cost of goods sold over here. And we posted it into here for the 400 with a journal entry. So there it is with a journal entry. If I go back, then that's another one that we pulled into. We pulled the two income statement items into February. And then we also recorded it with the invoice, the original invoice in March. So we have to do the reversing entry. So there it is. So now we've made it correct. We've pulled everything in properly. So it's been reported in February, which makes February correct, but we have this issue we'll have to deal with in March. Now for reporting purposes, you could export this to Excel and format this, where you might go into your layout over here and say, now I've got these, like these two are related. You might put them into a group, for example. So I could say, let's take both of those items and group them. So I'm going to say group those two inventory items. And the group heading is just inventory, we will say. And so there it is. And so then you could collapse this inventory for external reporting. And then it would be reported in one line, which is pretty cool that you can do that. And then the other one is accounts receivable. And then we made this one. I'm holding down control, by the way, to select these two non-adjacent items. I'm holding down control to click on both of them. And you could create a group. And then I can call this accounts receivable. Accounts receivable. And there they are in a group. So now I can combine these together for external reporting. And that amount of flexibility is not usually there in other kind of software with the kind of reporting and like a QuickBooks, for example, which usually has the sub ledger format instead of this kind of flexibility with the reporting. So that makes external reporting a little bit way more flexible, actually, than some other accounting software, including QuickBooks, but although it takes a little bit more of a learning curve to kind of get. So you've got those two kind of lined up together. And these two are lined up together in that sub ledger. Let's save that as a custom save. And so that's, again, I'm impressed by that. I don't know if I've emphasized that enough that I'm impressed by that. Okay. So let's open up our trial bounds to see where we stand at this point. So I'm going to tab to the right. Let's go to the accounting dropdown reports and type in trial balance. Trial balance and we'll just run it. I'll just we'll run it for the cutoff date and then we'll run it for the end date to let's say custom date and let's make it the end of February. So February end of February 28. So this is where we stand as of the cutoff date, not the whole year because we made some adjustments after the end of the year. And then if I run it for the whole year, let's do that too. I'll go slowly back up, slowly up. And then let's just run it for the whole year too. I'll just like custom date or the end of March. Let's just do end of March. And this includes the reversing entries that we have done thus far. So you can check your numbers to that if it's easier to do. And then we'll do a reversing entry for this one next time.