 QuickBooks Online 2022 adjusting entry depreciation 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 the 30 day free trial holding down control scroll it up a bit to get to the 125% currently in the home page otherwise knowing as they get things done page you can do by going to the cog up top switch to the accounting view down below we will be toggling back and forth between the two views either here or by jumping to the sample company file currently in the accounting view back to the get great guitars we're gonna open up some tabs to put reports in right clicking on the tab up top to do so and duplicating it back to the tab to the left right clicking again and duplicating again back to the tab to the left right clicking one more time and duplicating one more time as that is thinking let's look at where the reports are located in the accounting view jumping over to the sample company to do so reports are on the left-hand side under reports in the accounting view going back to the other tab to the business view we're on the second tab looking for the reports which is in the business overview burger up top and locating it's thinking hold on we're locating the balance sheet that's the one we want that's where we're going to start things out let's do the range change from 010122 to 022822 run it and then I'm gonna go tap to the right let's do actually let's do a month by month hitting the drop down doing the two months here and then run it again so there's our two month time frame let's go to the tab to the right and this time I'm gonna go down to the business overview again reports again close the hamburger again and go into the profit and loss of the income statement again and then we'll do the range change from 010122 to 022822 that being the cutoff date we're gonna hit the drop down we're gonna go down to the months to break this thing out by months run it Jan Feb tote that's what we want going to the tab to the right one more time business overview again reports again close up the hamburger again but this time typing in trial balance because that's the report we want the trial balance the TB the TB we're gonna do then the adjusting of the date range 010122 to 022822 run it poor father we're gonna go back to the balance sheet on the right now and we're now looking at the adjustment for depreciation as we we talked about last time which is similar to the prepayment type of adjustment but it's got a little bit of a twist a little bit more complicated item to it to the prepaid insurance as a good intro into the property plant and equipment so the property planting equipment also is one of those areas that you can't really if you're a small business and you're thinking I'm gonna go on a cash basis method I'm not gonna deal with any accrual concepts you can't do that typically because at least the tax code if nothing else will force you to do an accrual concept and sometimes the accrual concepts are helpful for internal reporting purposes for decision-making processes as well and this is gonna be one area that you're gonna have to report the large purchases as fixed assets at least if you're gonna do it properly for the tax code so that's gonna mean that you have large purchases like buildings machinery and equipment or furniture and fixtures for example automobiles those are things that because even if you pay cash the price is large enough and they're going to be used for a long period of time in the future that if you do not report them as assets and then allocate the cost over the useful life in some way you can have a big distortion to your balance sheet and that's why typically you that's originally why you you would want to use an accrual concept for that component even if you're on a cash basis for other kind of items the disparity is so great that the reporting could be heavily distorted if you don't use it a accrual concept in that case but also again the tax code will force you to in any case so you're gonna have to do something for that purpose so in other words if you wrote off like a large purchase over here in January but it was not showing in February and you were trying to do a fair comparison between January and February you would have a problem if you've wrote off a whole hundred thousand dollar car for example in January or equipment or something and not in February even though you're using it in February because that's not a fair comparison if I'm trying to say how was my performance in January versus February it wouldn't be fair to say well it's way worse in January because I happen to purchase a piece of equipment that I'm going to use for like 10 years into the future it would be more fair to allocate the cost of that piece of equipment equally to January and February even though purchased in January to try to look at performance between the two months that's the general concept so that means that anything that we purchase then that's a large item will typically gonna have to put put on the books as an asset now we talked about how you're going to categorize these assets which is often a point of contention when you're when you're trying to figure out how you're going to just do this logistically so anything that's over a certain dollar amount you might say okay now I might have to capitalize it and you might talk to your accounting firm to see whether that is the case you might not have a whole lot of transactions over that certain dollar amount because you're not buying big pieces of equipment all the time so at least that doesn't happen too often it's not a day-to-day type of transaction but when it does happen you want to make sure that you track it down now if I go to the first tab let's just take a look at our chart of accounts over here which is under the bookkeeping area if you were in the business view or the accounting view I mean it would be under the accounting area then we're going to go into the chart of accounts on the left hand side close up the hamburger and let's scroll down and you'll note that the accounts that they gave us originally included a whole bunch of basically accounts that they I think what they were trying to do what in terms of the fixed assets here we got all these different fixed assets accounts and I think there were more we deleted some of them but they were trying to basically indicate all those instances where you might need to capitalize something and but you may not want all that detail when you are actually recording these items because all that detail is going to cause you to do more differentiation with with your reporting meaning if you have a whole lot of different accounts that you're recording property plants and equipment to then you got to track the property plants and equipment a whole bunch of different accounts although if you have a whole bunch of different accounts it also gives you more detail and may give you some indication which accounts you would be used so there's going to be some trade-off but the easiest thing to do will often be to tie out wherever you're going to be calculating your accumulated depreciation and use the same kind of formatting as you enter the data so we talked about this when we entered the data if I was talking to my CPA firm which or my accounting firm or my tax preparation which is where the sub ledger will typically be made this is different than other kind of sub ledgers like the accounts receivable or the inventory which we have the sub ledger in our accounting system within QuickBooks you will typically not have the sub ledger for the depreciation within the QuickBooks often times because it's going to have a tax calculation component to it anyways and therefore you're going to need tax software typically to do that tax calculation and you might as well have the tax software also do the book calculation if the book calculation is different so that means you're going to be dependent on this external report from the tax software most likely and you're going to want to tie out your categories of like furniture and fixture and machinery and equipment and so on to the categories that are going to be on the sub report which are going to break out the more detail so that's what I would recommend doing I would recommend talking to your your accounting firm look at the reports that they're going to use for the sub calculations and then determine what your what your categories should be so we talked about that in the in when we did the data input into the system also note that the tax software is going to be using a tax basis method this is just an example of a difference that you can have between the tax basis method that being that the tax basis usually uses a double declining method and it's and it usually has a mid-year convention or something like that which is a little bit different that's double declining normal method and it might have special deductions for for the 179 and other special deductions so it could be substantially different than a book method that you might be using with with a consistent straight line or you might be using some kind of double declining method consistently even if you're using the same double declining it's going to have a mid-year convention on the tax code and it's going to have the these these other 179 deduction so it could be quite different so you could if in some instances possibly record your depreciation on a tax basis which means you don't have two different depreciation schedules you just record your books on a tax basis smaller businesses might be able to do that they lose a little bit of accuracy because the tax code is not designed for internal reporting purposes but you could do that or you can ask your accounting firm to also prepare the depreciation schedules on the book basis using the tax software which they should also be able to generate and giving you something like this so you want to talk to your accounting firm about what kind of schedules you should be using and what kind of methods you might want to be using for depreciation then with the categories that we have notice that these schedules are showing the categories the actual things that we purchase so we got the sofa the chair the recliner and so on under furniture and equipment these are just examples these are the purchases that happened in the prior year note that in the current year 2022 we don't really have to do anything to these prior year items because they're already in the system and they will be having depreciation recorded upon them however if we sold something that we had in the prior year we're going to have to take these items off the book now notice if they just recorded all this stuff as like one lump sum of whatever the lump sum total would be and we sold then say these benches or whatever then it would be a problem it wouldn't be a problem when they put it on the books but it would be a problem when we take it off the books because i'm selling one piece of this one lump sum thing they put on the books so when you give this information to your accounting firm you want them to put it in this this area descriptively breaking out all the categories to do that you're going to have to provide them with all the stuff that you purchased by category so that when you sell it you want to make sure that you can identify the thing that you sold so you might want to put the descriptive terms on it if there's numbers on it that would identify whatever you purchased as well you might want to put the numbers like a car license number or something like that or the different kind of equipment you might want to put the actual numbers if it's if it's has them so that you can identify them when they sell them it won't be a problem when you purchase them if they do if they are not or they're sloppy with the with the depreciation schedule but it will be a problem when you sell or dispose of them and then all the stuff that we purchased in the current year we're going to want to give them not one lump sum number but all the detail of the purchases so they can put them on there again in a line by line kind of setup have the proper date that will be set up to make sure that the depreciation calculations will be done accurately so in our case we got those and we had the purchase of the machinery and the equipment so we've got the the 98,000 cost versus the and the 5000 of the cost for a total of 103 if I go back on over to our reports on the balance sheet that should tie out to our categories and notice how much more easy that is if I can tie that category out to the 98,000 and then the the equipment tying that out to simply the 5000 so that is a lot easier for to me to tie out than a bunch of categories that are different right they have different category names so and then we got to tie out the accumulated depreciation so this is the prior year depreciation 7005 that's what's on our books here so we got the 75 here and then the current depreciation now normally this will record the depreciation on a yearly basis so the easiest thing to do then would generally take the depreciation and break it down to the portion of the year that you are looking at so you might only record depreciation possibly depending on what type of industry you're in on a yearly basis you might say okay I'm just going to do my taxes I'm going to get the information from the tax prepare and then take these depreciation schedules and report it yearly however you might want to report it monthly which means you would want your accounting firm to add these new items as you purchase them even though they're not doing the taxes during that time so you can update the depreciation schedules and basically record the depreciation monthly you could do that so in our case this would be for the current time period the 14 001 so but we only have two months that have passed so I would have to calculate the 14 001 divided by 12 that would be the monthly amount times two for the two months that have passed 233 305 that's the depreciation expense I'm going to record for two months for the total furniture and fixtures if I go back on over now if I go to the balance sheet you might say well wait a second shouldn't I record the depreciation for January I could I could do two adjusting entries one for January one for February that would be kind of more consistent if I was recording these items on a month by month basis but possibly and I'm going to imagine here that we were not recording them basically on a month by month basis we're recording them because possibly we need to provide the financial statements to somebody as of the cutoff date which in this case happens to be February for example the bank or something like that who wants the financial statements for whatever reason as of the cutoff date so again I'm not even good I'm not going to try to make January I'm not going to do the adjusting entries for January I'm going to make everything right as of the cutoff date in this case for the two month time period which would be similar to if you were trying to make everything right just on a yearly basis as of December 31st instead of making 12 adjusting entries which again you you could do that you could also do 12 adjusting entries as the period goes depending on what your needs are okay so let's do ahead and do this we can we can do this with the with the journal registers let's go to the first tab so if I go to the first tab and I scroll down I could hit the hamburger up top and I could hit the plus button and use the journal entry but there's only two accounts that are affected so when that is the case I'll go ahead and use the register I'm closing the hamburger I can't use the register for depreciation because the the because the depreciation is an expense account doesn't have any register related to it but by the way let's see if we have a depreciation account down here I don't think we have one so we're going to have to add depreciation and that means I'm going to have to switch to I'm going to have to switch to the accounting view so that QuickBooks doesn't drive me crazy when I try to add an account I mean there no we do have depreciation there it is there's depreciation okay so we're good so then we're going to have to go into the accumulated depreciation because it has a register so we're going to go into accumulated depreciation which is a fixed asset account there it is for furniture and equipment so I want to be picking this one up and let's go ahead and view the register now this one's the weird one because it's a contra asset account so notice I put it in here as a as a decrease even though like from journal entries standpoint it would be an increase in the credit direction but it's a decrease because it's a contra asset account so it's following like the asset rules but it's a contra asset so I'm going to hit the drop down and go journal entry this is as of 022822 the cutoff date 0228 and then we're going to say that this is going to be memo adj entry that's at least what you want you might want to say record record two months from tax depreciation schedule or something like that and this is going to then be that amount that we calculated 2333.5 and the other side's going to go in here let's see if they let me find it in the business view there it is depreciation there it is no problem and so there we have it now notice again if you got to be careful because it's a decrease it's not really decreasing the account it's increasing it in the credit direction but it's a contra asset so it's going to decrease total assets so like put it in here's a decrease that's why the increase and decrease thing is not as good as debits and credits if you know debits and credits but let's not get into that at this point shall we and then we're going to say there's the 983350 if i go back to then the the balance sheet and run it run and scroll down so now we've got the furniture and the equipment at the 98000 that's correct and now we've got that two months that have been increased we're now at the 983350 you might be saying hey why don't why don't i just record it to a decrease to furniture and equipment kind of like i record a decrease to the prepaid insurance account what's with this other contra asset account that you made here that i have to then have a subcategory four and the reason for that is because the prepaid insurance i know exactly how much i consumed i consumed one month of 12 months i know exactly what this number is it's not an estimate down here it is a big estimate because i'm trying i'm kind of indicating that this value is is like the actual value which it's not under this method it's really the allocated it's the book value it's the book value that we're talking about because i don't really know what the fair market value is and even if i tried to know what it is it would be quite difficult because the equipment each piece of equipment is unique in its nature and so for it's so i don't know what it is so i'm basically have this contra account that gives us the added detail of saying hey look this is what i purchased it for i knew what it was worth at that point in time i've allocated the cost of this amount over the time frame thus far and therefore the remaining cost that has been unallocated which is the book balance which hopefully is close possibly to the fair market value in theory is going to be this amount but i don't really know what the fair market value is because the equipment is unique and i'm not selling it on the market to determine what the current fair market value is okay so there it is let's go to the income statement other side and then we're going to run it again and then scrolling down and we're going to have the depreciation that has been recorded there's the depreciation let's drill down on it this time there's our journal entry let's drill down on it again and it doesn't take me to the register but rather it takes me to the journal entry i'm going to copy this description and put it down here so it's on both sides both sides should have a description it's not fair to just have it on one side i'm going to go back then to our report okay let's do it again going back on over if i go to my the second category we had was equipment machinery and equipment so again if we have the same categories on our books as on the balance sheet it's going to be a lot easier for us to do the calculation so i'm going to say okay this is for the current year for the whole year it would be 833 so i'm going to say 833 divided by 12 times 2 divided by 12 months times two to get that two month time frame the 138.84 about so we'll do that recording in the same fashion the fashion we did last time is the same fashion that we'll apply this time going to the first tab going to go back to the chart of accounts because we need to be in the other accumulated depreciation account this time for the machinery and equipment so that that's the register we want view that register you view it do you view it let's go into it by clicking on the viewing hit the drop down we're going to go to the journal entry this is as of the cutoff date which as you know is 0228 22 and then we're going to say the memo is an adj entry i'm just going to leave it at that this time this is going to be a decrease because it's a contra asset account even though it's actually an increase to the contra asset account but it's decreasing assets in general and quick books has this in there is like a normal asset account so it's a decrease instead of the increase which it would really be in terms of debits and credits and then the other side it's just going to go to the depreciation expense now you might be saying why don't i have two depreciation expense one for the one category with another for the second you could but it's a little bit more it's a little bit more detailed it's just a question just like any other expense do you want the added detail or is it worth it not to have the added detail or not we added the added detail on the balance sheet because i think it is worth seeing the the cost versus the accumulated depreciation and the book value on the balance sheet instead of just total cost in one account and accumulated depreciation for all categories it may not be as worth it on the income statement to have that broken out on the expense side of things but it may and that's a choice that you need to be making with regards to how much detail you want versus the simplicity of doing the data input so there we have it let's check it out let's go to the balance sheet again let's run it again we'll run it another lap the balance sheet is like another lap do another lap balance sheet run it again run it again we're going to go down and say that we've got then in our fixed assets now we've got the five thousand and the one three eight point eight three to get us the total the net total here and then we've got the total so notice how we set it up we've got the fixed assets we can say this is the total fixed assets if i close up the carrot which is breaking out all the fixed assets categories which includes the normal fixed assets and the accumulated depreciation related accounts if i open them up i can then see the book values closing up these carrots which show us the net of the cost minus the accumulated depreciation if i open up this carrot now we've got this amount the cost of the furniture and equipment minus the accumulated depreciation the cost which has been allocated over the two month time frame giving the book value the value at this point in time not the fair market value but the cost minus the amount that we have allocated which may hopefully give some semblance to the fair market value as well and we're going to hit the drop down here machinery and equipment was five thousand minus the the one three eight point eight three and then if we take the book values of those two the total fixed assets then the sum of these two of course being if we sum those up eight eight one six six point five plus four eight six one point one seven the ninety three twenty seven sixty seven other side on the income statement let's run it again do another lap income statement do another run it again you didn't do it fast enough last time run it again we're going to go down and say it's on the depreciation so there's the depreciation with our two transactions that have been there so we're going to open that one up there we have it looks good okay that's what that's what we have thus far is there a reversing entry related to depreciation expense like with some of the other ones we saw no there isn't because it's a permanent it's a permanent adjustment no reversing entry therefore let's go to the trial balance to see where we stand let's check out those two strong legs we got oh one oh one two two oh two twenty eight two two notice that the legs look a little less strong when we when we calculate the depreciation because a lot of the adjusting entries by the way are going to be decreasing the net income so net income is we're looking worse than we other when we did before because now we're we're allocated these expenses to the to the income statement so it could be kind of disheartening on one hand because of that for most most of the time it usually you usually end up with a lower net income but on the other hand it's good for taxes to have these expenses so it's like a like you know there's a cost benefit there's a good side and a bad side and if you're an accountant you're going to be tugging back and forth between those two things all the time with where you got a client you're going to do what's whatever you're supposed to do of course with regards to whatever accounting method you're using but you're going to have clients that are going to say i want to look bad for taxes but i want to look good whenever i want to get a loan or try to get someone to do an investment or something like that or something obvious you can't look good and bad at the same time you know and at the end plus it is kind of just what it is so in any case if we go then to the trial balance this is where we stand these are our two legs the debit leg and the credit leg if you tie out if your legs match the numbers on these legs then good if not we'll do a journal entry report at the end of the period to diagnose any differences