 QuickBooks Online 2023. Adjusting entries and reversing entries introduction. 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 opened the free QuickBooks Online sample company. If you want the two open at the same time we suggest 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 window if using google chrome by selecting the three dots up top incognito window type into the search engine QuickBooks Online test drive we're using 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 change between the two by going to the cog up top switch the view down below duplicating some tabs like we do every time right click in the tab up top to duplicate it and then we're going to right click on the tab up top to duplicate it back to the tab to the middle go to the reports on the left hand side and we're looking for the financial statement reports the balance sheet if you're in the business view by the way the business overview that's where the reports are located in that view and then we're going to go to the tab to the right open up the other statement which is going to be in the reports on the left this time the profit and loss the P in the L and close up the hamburger scroll up change the range 010123 to 022823 I'm going to look at it month by month so we can see the two months of data input we've done thus far Jan and Feb and the tote the year to date going to the tab to the left and closing up the hamburgies scrolling up to the top change in the range 010123 to 022823 and then we're going to run that one and let's actually see that on a month by month as well hitting the total change in the total to months and then run it again so we've done two months of data input now we've done the bank reconciliations now we want to think about period and adjustments and the concept the overview why we might do period and adjustments or adjusting entries when we might do them how we might structure doing them and which accounts might need some adjusting entries so the adjusting entry process is typically done at the end of the month or the end of the year and it's done to to make the financial statements be more closely aligned to the accounting method that is use in use that's often going to be when you learn it in like accounting courses the accrual accounting method but in fact in practice you you might be on a tax method or something like that if you're small business and you're primarily doing your bookkeeping in order to do the taxes at the end of the year you might have an attack space method you might have it even on a cash based method and even then you might still have some adjusting entries that need to be done now note adjusting entries if you learn it in a in a book scenario in a classroom you're often going to hear them being applied at the end of a month for example each month but in practice for small businesses you might do the adjusting entries on a yearly basis so that you get your financial statements lined up as best you can for the use that you might have for them which is going to be the taxes in the United States so that's going to be the general idea so what we what we would like to do is think of a delineation in our mind between the bookkeeping or accounting process and the adjusting process that's going to be done at the end of the period they might be done by the same person but it's useful to keep those two things separate and oftentimes they're done by different departments or different people altogether such as the bookkeeping or yourself or the accounting department versus the CPA for example or tax preparer that's going to be doing adjusting entries possibly at the end of the year the adjusting entries are the things that we have been doing to construct the financial statements and those are primarily with the forms we go to the forms we have the cycles that are in place we're entering the financial transactions with these forms that are entering the double entry accounting system and constructing building the financial statements our goal from the bookkeeping or accounting side of things is to try to make this system as as easy as possible and if we can automate the system as much as possible we can automate the system to make it as easy as possible and also be able to communicate with the people we're doing business with well customers vendors and employees that's the general idea so that the business goal in and of itself the overarching goal for the business of revenue generation can then focus on what they do to generate revenue and not so much on on the accounting and bookkeeping process and then of course the goal for the end of the period for the adjusting entries is to take what we have and adjust it to be more perfectly aligned to the accounting method that is being used now let's focus on some of the differences between the adjusting entries and the normal day-to-day input entries the normal day-to-day input entries are usually done not with a journal entry but with the use of the forms the forms being designed to make the data input as easy as possible as well to have the connection of those forms so that we can communicate with the people we're doing business with customers vendors and employees so the general rule for the normal day-to-day stuff is if there's a form that I can do the data input with I'm going to use the form rather than a journal entry if there is no form then I'm going to think is cash affected and I'll use typically a deposit or check or expense form and if that's not the case only then do I default to entering just a journal entry now note that all of these forms except the things that aren't actual entering a transaction like an estimate for example or a purchase order all of the forms enter a journal entry into the system but they do so with the with these data input forms with the period end adjustments we're going to be doing all of them with journal entries so we could do the journal entries using the register if it's a fairly easy with only like two accounts affected adjusting entry but we're going to be using journal entry forms I have to do all of them also obviously all the other data input forms are happening as they happen in real time whereas the adjusting entries are only going to happen at the end of the period in our case we're going to do them just for the end of February here so we're going to imagine we need to do our financials just for the end of February obviously normally you would only you would be doing adjusting entries either on a monthly basis or possibly just at the end of the year December for most small businesses or most companies in order to do taxes or financial reporting on the yearly basis but we have two months of data input so our cutoff date is going to be 228 will be the cutoff date for us so all of the adjusting entries will be entered as of that point in time that means that they're not going to be the financial statements we're not even designing or looking to be perfectly on say the accrual basis method or whatever basis we're looking at for the entire period we're going to recognize that it's not going to be perfect on say 222 or 223 or 225 February 25th for example because we're but we're gonna we're gonna sacrifice that to make the ease of the data input as easy as possible and then get the financial statements correct when we need them for reporting purposes and tax purposes at the end of the period in our case 228 now another difference usually is that a classical adjusting entry will usually not involve cash cash has been dealt with because we entered the cash transactions and we did the bank reconciliations so cash is usually good it's usually a timing issue with the adjusting entries so one cash isn't affected which is a big difference than many other kind of transactions and two there's usually a balance sheet account and an income statement account affected now that's not always going to be the case but a classical adjusting entry that is the case it's a timing difference and therefore there's usually going to be a balance sheet and an income statement account affected so those are the general rules adjusting entries going to be entered with a journal entry instead of a form adjusting entries are going to be entered as of the end of the period and adjusting entries usually have a balance sheet and an income statement account at least one of those two they might have more accounts involved but that's not always the case as we will see here but that's a general rule now then we're also going to have the concept of reversing entries now so the reversing entries are going to be entries that we enter the day after the end of the period in our case February 28th the day after is going to be the first period of the next the first day of the next period which is March 1st in our case or if you're doing December year end December 31st you reverse the reversing entries in January now the only reversing entries we would make are for entries that were temporary and in nature so so if there's a permanent adjusting entry we entered like a depreciation for example we typically wouldn't reverse that but if there's some kind of temporary difference it's a timing difference and we're trying to say hey look the accounting process is doing great the way they have it I don't want to mess up their system such as with payroll for example payroll is complicated enough they're going to use whatever system they have entering payroll every two weeks or every month or every week whatever they do I'm going to have to adjust it to fit into the period end uh for adjusting entries but I don't want to mess up the payroll because whatever system they're on is good so I'm gonna have to reverse it as of the first day of the next period that's the general idea and again the idea being I want the accounting department to do things as smoothly as possible and if there's some kind of timing issue that's messed up because of the accrual method or whatever method we need to use then I don't want to mess them up I want to try to automate the system as much as possible let them do what they need to do and then make periodic adjustments to have the financial statements correct at the point in time that we need the reporting of them so let's just go really quick you can kind of get an idea just looking at the balance sheet accounts and which accounts might need adjusting entries and then we can and then you can kind of hone down your system if you're a bookkeeper you really want to think about this idea you want to be thinking what kind of businesses do I want do I how automated do I want the system do I have a network of people that can do the adjusting entries like tax preparers and CPA firms and whatnot so that I can do what I'm doing on my side and depend on these other people that are in my network possibly to do what they do so that I can scale up my business possibly a lot of people scale up their businesses small bookkeepers possibly by trying to keep their books more in a cash based system trying to use the bank fees to automate the whole process but to do that even if you're working with companies that are on a cash based system you're going to have some accrual things you have to deal with and if you're working with a good CPA firm or something that can do adjusting entries then they can help you to still basically automate your whole system scale up and then and then let them do the adjusting entries periodically okay so cash doesn't usually have an adjusting entry related to it because we did the bank rex and they're good to go accounts receivable you'll remember is an accrual component so if I look at the flowchart that's when we enter the invoice so that's on the customer side of things if you're in a very simplified business like you just get paid from youtube or something then you won't have receivables you'll just record a deposit or if you have cash register sales no invoices so this is an accrual component so by definition if you have to track accounts receivable you've moved away from a cash based system and now you're on an accrual based system because of the the need for you to track the accounts receivable so there could be timing issues with the accounts receivable now one of those issues could be for example that you enter the invoice when you enter the invoice you you actually did the work before the cutoff in our case you did the work in february but maybe you entered the invoice in march for example so it's not a perfect system the fact that the invoice is recording the sale in terms of the timing frame because it's possible due to the billing structure that you actually entered the invoice after you did the work in the period after you did the work in which case you could result in an adjusting entry that might not be as common for small businesses but you know that that's one of the issues that could happen the other issue is that issue with the deposits that we talked about which we'll get into in more detail with the unearned revenue kind of issue where we said it's possible to receive a payment before you do the work like you get a down payment or you get a prepayment from the customer before you do the work that should be recorded as a liability but logistically within QuickBooks it makes sense to make a negative receivable so if i looked at the sub ledger we'd have some negative receivables and we should break that out for financial reporting to a liability so from my perspective this is not a classic adjusting entry and that it doesn't have a balance sheet and income or timing difference account but it works like an adjusting entry in that from the bookkeeping standpoint it makes sense to have a negative receivable because that ties out really well in the sub ledgers because the sub ledgers are tied to accounts receivable as opposed to an unearned revenue but periodically then i can just go in there and make an adjusting entry if i need to so well that's a little bit of confusing one we'll talk about that more later inventory is one another item where by definition if you have to track inventory on your balance sheet you've moved away from a cashed based system so if you have very small inventory maybe you can stay in a cashed based system and just write off the inventory when you buy it because you're going to use it very quickly to make a sale but if you have to put the inventory on the books as an asset once again we've moved away from from a cashed based system to an accrual based system so we'll have to do like physical counts on the inventory and and record the inventory properly so there's not often like a an adjusting entry that really needs to happen there other than you want to of course do a physical count at the end of the period and see if your inventory is actually accurate there then we've got the prepaid insurance and it might be easier first to talk about like the depreciation because that's like the most extreme case of like a prepaid kind of situation so and it's also one that you can't avoid again even if you're a cashed based system so even if you're a cashed based system you're saying hey i'm doing everything cashed based well the tax code is still going to force you with large purchases like equipment buildings even if you paid cash you can't just write them off as an expense and you can see why that would be if you had a hundred thousand dollar building expense down here and then you tried to compare january to february it would be like if you bought the building in january you would have this massive loss in january compared to february which isn't actually accurate in terms of the performance because you bought the building and you're going to use it for 30 years into the future so there's you don't have the comparability and it's so extreme it's so obvious that that's a problem with comparability with property planting equipment that even if you're on a cash based system where you're kind of forced people just recognize that oh yeah i gotta put that on as an asset well why because you're doing an accrual thing you're putting on the books as an asset as opposed to expensing it when you purchased it because it's such an extreme example of the situation and the tax code is going to force you to do that as well so uh notice that the furniture and equipment shouldn't have too many transactions related to it so whenever you make purchases then you can give that usually the sub ledger is going to be done by your tax professional so you're usually going to have to be dependent on the tax professional to give you the depreciation schedules which they can do either on a book basis or a tax basis and then we're going to have to record the adjusting entry of accumulated depreciation that's when we allocate the expense to the time period we actually used it or that's what we're trying to do although it's just an estimate which is why we we don't actually write down the furniture and fixture or fixed asset account but use another account called accumulated depreciation it's a contra asset account so we'll dive into that more detail later but everybody kind of has to deal with that a cruel thing even though even if you're on a cash based system and you're small business and you're just trying to do things for taxes or something like that the same concept is here for any kind of prepayment and insurance is the biggest is the most common example because insurance by definition is something you paid for before you did they they gave you anything right you didn't get the coverage you can't get the coverage and then pay for the insurance you have to pay for the insurance before giving the coverage now if you pay for insurance every month then if you just expense it monthly you're pretty close and that's probably not a problem but if you pay for a whole year's worth of insurance up front which is often cheaper and so therefore many people do it then you're gonna have the same issue where you have this big the insurance expense say in january if you paid for it in january versus february and therefore the typical method from an accrual standpoint is like with the furniture equipment you put it on the books as an asset and then you've got to determine how much of it you have consumed over the life thus far as of the cutoff date and make an adjusting entry this time not making a contra asset account as is done with fixed assets but just writing down the insurance account directly so so we'll dive into that in more detail you could do a prepaid insurance for any kind of expense account if you prepaid it but there's certain type of expense accounts you're more likely to do that with uh accounts payable is another accrual account so if you're using the accounts payable then you're likely uh going to be on an accrual basis and you could have basically timing differences with when you entered the bill it's not as common to have problems with the timing differences on the accounts payable as with uh the accounts receivable the visa account is a credit card account it's kind of like the the checking account in that you should hopefully have entered all the data and reconciled it and so there's not usually going to be any kind of added adjusting entries for the visa or credit card accounts then you've got your this is the taxes that you have to pay so you could you know make sure that your liability is correct and ties out to your liability statements that are owed for your sales tax and then your loans on the loans uh notice that these have some some issues that are that you can think about as a bookkeeper how to most easily do the loans one you've got multiple loans so i would put each loan on the books in their own account possibly as a as a subsidiary account to the parent account instead of having one loan account but when you do the taxes or when you do financial reporting you're probably going to report it as just simply loan payable you also have the short term and long term loan payable situation that you have to deal with which means you i wouldn't break that out every time you do a loan payment but you might have a loan that has a short term and long term component to it and that's when i would like to work with a cpa and be able to say or an accountant or a tax preparer to allow me to do that adjusting entry if i was a bookkeeper and say hey look i'm just going to put it in one loan account you break it out here's the amortization schedules that's your thing right my thing on the bookkeeping or accounting side is to make sure that the loan accounts are accurate and you can even go a step further than that as a bookkeeper if you're trying to automate the system you can say hey i'm going to record one loan account per loan and i'm going to make all the payments go directly to that loan account not breaking out interest according to the amortization schedule because the interest and principal changes each time and i want to automate my system so that i can enter the data on a cashed based system so i'm just going to record everything to the loan account here and then i'll give you the loan statement cpa or an accountant and you can make the adjusting entries breaking out the proper amount of interest for the year or whatever the time frame is and then breaking out the short-term and long-term portion and that way again the bookkeeper is trying to be automated do everything basic with the bank feeds and and then have a good cpa or accountant that knows what's going on that can periodically break out the stuff and do what they do uh and then you have a nice core the same thing is with the payroll if you're doing payroll within the system then then you're gonna have to it's gonna have to check that all your payroll ties out to the w2s the w3s and and and the 941s that matches what's on your uh payroll here and you might also need to do an adjusting entry because the payroll period that you have say you pay people weekly you might have paid someone you know your pay period might have might have three days uh before in february in two days that are outside of february right and so the so then you've got this situation where the pay period doesn't line up to the actual uh to the to the end of the to the end of the of the period and you might have an adjusting entry basically related to that so that's one issue that you can have with the payroll another issue that you can have with the payroll again is you could try to say hey look i'm trying to automate the my system again and payroll just messes everything up because again it forces you if you run payroll within the system to be outside of a cashed-based system because now i have to do this a cruel thing of the withholdings but if you hire you could hire a payroll professional you could say look i'm gonna automate my system on a cashed-based system try to scale up that way i'm gonna try to get my clients to be using a payroll professional they run the payroll and they do their whole payroll thing i just wait till it goes through the bank and i record it as payroll expense and then i give the payroll reports and uh and this in my financial information to the cpa or tax preparer at the end of the year and they properly break out the liabilities versus the expense payroll expense versus tax expense and so on given that information so again that's another way from a bookkeeping standpoint you can think of it a few different ways do i want to do payroll within the system if i do that one of the adjusting entries at the end of the period you're probably going to depend on a cpa or an accountant uh if they need to do those kind of adjusting entries and maybe i want to be on a cashed-based system and i try my best to to have a payroll provider so i can scale up on a cashed-based system and automate all of the systems working with a payroll provider to do all the all the other stuff with payroll with the paystubs and stuff and then give all this stuff the payroll reports and the financials to the bookkeeper at the end of the period to do the adjusting entries and if that all if you have a good network that could work quite well okay so those are those are the general adjusting entries that we'll go through and we'll go through a few of them in more detail one by one in future presentations