 In this presentation, we will enter a journal entry to close out the remaining balance in the factory overhead account. This is typically something that will be done at the end of the period, at the end of the month in our case. We want to do it now because I want to keep it close to some of the other types of journal entries that we've put in for factory overhead. 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. Here we have a Western Digital WD elements 20 terabyte USB 3.0 desktop external hard drive. We use as part of our backup system, noting that if you lower the number of terabytes of storage, the price will lower dramatically as well. 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Once the work is done, then save the project to an external hard drive such as this. 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. So the story is this, what's happening here is it's the end of the month now. We're not going to have any more jobs. We're not applying any more information or any more costs to the factory overhead. And we're not going to, we've already allocated to all the jobs that we're going to for factory overhead for this month. If we look at the GL account then for factory overhead that supports this number, we can see, you know, there's kind of a lot of activity that happens in factory overhead because it's going to be that bucket that has everything else in it that we couldn't apply to the job. So that's going to include things like indirect labor, it included things like indirect materials that included anything that we was on the factory. We put in the factory overhead. Now, our goal here was eventually to apply it to the job using some type of estimate. And we did so, we applied it out to the job, but the estimate was not exact. And again, you might ask like, why wasn't it exact? Why can't we make it exact? We see the number right here. Why didn't we apply out the 7100? And again, the problem with that is there's a few different problems. But one is that we typically would apply it out as the jobs are happening, not at the end of the month. So in this particular problem, we kind of waited till the end of the month and did this in an order so we can see the costs going into factory overhead and then us applying them out. But we in practice oftentimes will be applying them out to jobs as the jobs are going. And therefore we wouldn't even know, say that this would be the number for the entire month's worth of factory overhead. We wouldn't know that as we're applying it to the job, the things like the rent on the factory, things like utilities, depreciation, those things wouldn't be recorded till the end of the month. So all we can do is estimate what we think factory overhead will be at the end of the month. And based on that estimate use some type of ratio analysis to apply this information out to the job. And of course that's an estimate and it's not going to be exact. So we applied out 6,720 when the actual amounts, all the debits of the actual amounts added up to 7100. We applied out based on our predetermined overhead rate 1.6 of direct labor. We applied out 6,722 jobs. We have 380 that we couldn't apply out to any job. We didn't know which job to put it to. So that's going to happen every time because it's just an estimate. So now our question is what do we do with that because we want to start over next month. We would like the factory overhead to be zero next month so that we can start over and work through next month. So we've got to kind of clear this out. This is kind of like a forced temporary account here that we're going to have. And the way we're going to do that is we're going to clear it out to cost of goods sold. We're just going to force it to work. We're going to make it zero. And you might ask, well, that seems not right. Why can we do that? And the reason is one, because hopefully this is a small amount. If it's a large amount, we might have to go back and do some reallocations to it. But if it's a small amount, then we can say it's not material to decision making. If it's not material to decision making, what's the easiest thing to do with it? To record it to an income statement account because the income statement accounts will close out to retained earnings and they'll go away. They'll just be part of retained earnings after this time period. And we can kind of get rid of it in that way. And again, it's small, so it shouldn't affect net income or our decision making processes or distort our financial statements, hopefully. And therefore, it'd be okay to do that. Why income statement account would we choose cost of goods sold? Because ultimately, that's where it would go on the income statement if it went through the entire process. Meaning, if we were able to properly allocate it, it would go to a job. The job would then be sold. And when it was sold, it was going to go to an income statement account in the form of cost of goods sold. So this would be its ultimate destination in any case. So that's the justification for it going to cost of goods sold. So again, we got this difference. It's going to happen every time because we're using estimates. We need to get rid of it. We got to put it to an income statement account to do that because the income statement accounts will close out to retained earnings. We're going to choose cost of goods sold in order to do that because that would be the natural income statement account to choose. Also note that this amount could be a debit or credit at this point. It happens to be a debit now. But if it were a credit, we would still write it off to cost of goods sold. And that means that cost of goods sold could be... We might end up having to credit it in order to do this, which should look a little unusual. Cost of goods sold is an expense account. It usually only goes up in the debit direction. This is an exception to that rule typically because if we have to credit cost of goods sold, we'll do that anyways because we're going to do whatever we need to do to make this go to zero. It's not about cost of goods sold. Cost of goods sold is just an account we're using to clear this out. And the reason it's okay is because it's in material to decision-making processes. Okay, so that's what we're doing. So the journal entry is pretty straightforward once we know that. We're just going to say, okay, I need to make this zero. It has a debit balance in it currently. So we're going to do the opposite thing to it. We're going to credit it to make it go down. So I'm going to right-click and copy that. We're going to put that on the bottom in F5, right-click and paste 1, 2, 3. The credit's just going to be for whatever's in there. It's going to be 380. Then we're going to debit something. We've got to figure out what we're going to debit to. Negative of that number, debit 380. You could just type it in there. We're going to say, hmm, where could I put this thing? Get rid of it because I don't want it there for next mod. How about down here somewhere so then it flows out to retained earnings and we don't never have to see it again. It seems logical to put it to cost of goods sold because that's what would ultimately go anyways at some point in time. Let's do that. So cost of goods sold, expense account. We're going to right-click and copy. Again, it doesn't make sense to think about the expense account here and say, does it make sense from a cost of goods sold perspective in any other way than what we've discussed? Meaning cost of goods sold is an expense account. It only goes up with a debit direction. It doesn't mean necessarily we're going to debit this because we could be crediting cost of goods sold because again, we're doing whatever we need to do to clear out this estimate that was wrong because it's an estimate. So we're going to go back up here and put this into F4 right-click and paste 123 and that's it. So then we'll just post this out. Here's cost of goods sold, cost of goods sold is way down here. So we're going to have to scroll all the way to the right to post this to the GL. So it's going to be in the same order, assets, liabilities, equity cost of goods sold way over here. It's going to be on the debit side. So I'm going to put my cursor in AA18. We're going to use our arrows to do this. I'm going to hit equals, then use the left arrow to just keep going left, left, left, left up, up, up to get to that cost of goods sold and enter. So there's the cost of goods sold goes up to the 380. That 380 then can be found on the trial balance. Actually, the 380 there is fun on the trial balance. We're out of bounds by the 380 and net income went down by the 380. That's a loss because there's no revenue. So we actually did hit the income statement, but it's for a small amount here. And then we're going to record the other side, factory overhead to bring it to zero. That's third to last asset account. So we're going to go down here. It's right there. We need on the credit side. I'm in T 30 where we say equals. I'm going to just scroll up to the last journal entry. And there it is 380 and enter. So that brings the 380 down by 380 to zero. That zero balance is now on our factory overhead here. So that's we achieved our goal here. We did affect the income statement and affected net income for this time period, which may or may not be right. It might be wrong timing wise. It should go there anyways at some point in time. You know, it's only a timing difference hopefully because we will sell the inventory at some point, but it's off timing wise. It should be pretty small relative to our, the rest of our information when we were, and we haven't recorded the sales point, which we'll do later. So it should be small compared hopefully to the rest of the numbers. And therefore it's okay to do that because we need to make this zero so that we can start this whole process over in the next time period, the next month.