 QuickBooks Online 2024, adjusting entry related to loan payable breaking out the short-term and long-term portions. Get ready, some coffee and clear your mind, because we don't overanalyze, we intuit with intuits. QuickBooks Online 2024. First, a word from our sponsor. Yeah, actually we're sponsoring ourselves on this one, because apparently the merchandisers, they don't want to be seen with us. But that's okay whatever, because our merchandise is better than their stupid stuff anyways. Like our, trust me, I'm an accountant product line. Yeah, it's paramount that you let people know that you're an accountant, because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep, complex and nuanced questions. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Here we are in our get great guitars 2024 QuickBooks Online sample company file, we set up in a prior presentation, opening up the major financial statement reports like we do every time in the reports on the left favorites. Right click it on that balance sheet to open that link in a new tab. Same with the P&L, the profit and loss otherwise known as the income statement. Same with the trustee trial balance, the TB. Let's tab to the right close up the hamburger and change the range. We're going from 010124 to 022924. Dropping down so we can see that the months broken out. Run the report tab into the right close in the hamburger and let's do that changing of the ranging again. 010124 tab 022924 tab and we want to see the months run it. And then we'll tab to the right close up the hamburger and do this again 010124 tab 022924 tab. We want to see the months and then run it to refresh it. Let's tab back to the balance sheet. We're doing the adjusting entries. Those entries done at the end of the period, typically month or year to get the financials as close to the accounting method used as possible. The accounting method typically being the accrual method, but we might have similar processes used for a cashed based method or a cashed based method. Whatever the purpose is of the financial statements at year end might be external reporting, might be for tax preparation. We now want to take a look at the liabilities. So we have our liabilities of our loan payable. So we have the two loans that we had outstanding. And with the loans, there's a few things that we just basically want to touch on that can be a little bit confusing a few different ways that we can separate duties between the bookkeeping process and the adjusting entry process. Whether we be doing both processes or if we have two people doing the different processes. Now with the loans, one thing with the loans is that when we put the loan on the books, it's usually something that doesn't have a normal journal entry related to it. Meaning if I look at the plus button, these items up top, these are the forms that make the normal journal entries that are part of the normal accounting cycle. Loans are not something that happen all the time. They're something that happen often at the beginning of the business. And when we are leveling up the business buying a new building or something like that new equipment, that's when we're typically going to need a loan. So therefore, when we put the loan on the books, we might use something like a deposit form because it might be going directly into our checking account. But we might also be financing the purchase of equipment. So for financing the purchase of equipment, we might use a journal entry form to enter the loan on the books. We also might want to discuss that purchasing process with our accountant oftentimes because if there's any complications within the purchase process, such as a trade-in or something like that, then that can complicate things greatly in terms of putting the loans on the books. Oftentimes, what might be useful when separating duties between the bookkeeping process and the adjusting entries at the year end would be saying, hey, look, I'm just going to record the loans on the cash-based type of system when cash is affected. And then I will do the giving of that information to the accountant so that the accountant can shore up the purchase process, make sure the journal entry is in accordance with the depreciation schedules if there was any trade-in or anything like that, which is something that's difficult to get right from the accounting side of things, from the bookkeeping side of things, due to in part the depreciation schedules being generated oftentimes by the accountant or by the tax software as the subledger. And because you might have actually two different depreciation schedules, you need to deal with one on a cash-based method, one on an accrual-based method. So first thing I want to point out, when you put the loan on the books, you possibly want to communicate with your accountant and decide exactly how you're going to put the loan on the books. And then from that point in time, once the loan is on the books, then you're going to have to be paying the loan payments if it's an installment loan, a typical loan we're used to, a loan type we're used to with mortgages, for example, where we pay equal payments on a monthly basis, but the interest and the principal will differ with each payment. So that's the next thing that we have to kind of consider how we're going to deal with that from a bookkeeping side of things. So again, there's a couple of ways that we could do that. If we have the loan on the books, I could put the loan on the books and say, hey, look, I want to stay on a cash-based system as I do the bookkeeping and automate things as easily as I can. Therefore, every payment that happens on a monthly basis, I'm just going to record it as a decrease to cash that would go through possibly the bank feeds, helping me to record it with the use of the bank feeds and record the other side to the loan payable ignoring interest when I do the data input so they can automate the process as easily as possible, then at the end of the year, allowing my accountant to shore everything up by creating the proper amortization schedule and using it to break out the interest necessary for the period, for the year, for example, if we were doing it for taxes, as well as break out the short-term and long-term portion of the loan if necessary. That method works good if you have a good tax preparer or accountant that can help you to shore things up at the end of the year because it allows you on the bookkeeping side of things to not have to worry about the fact that there's a difference between the portion of interest and principal with each payment. In other words, each of these payments that we make on the loan will be the same, similar to a mortgage payment, but the breakout of interest and principal, interest being like the rent on the loan, is going to differ. So I can't really memorize the transaction very easily when I'm trying to record it on a cash basis going through the bank feeds. I could try to set up another system where I try to record everything in advance, according to the amortization schedule or something like that, but the easiest thing to do is say I'm just going to record the cash payment, decrease the loan balance, ignore the interest, and then let my accountant shore everything up at the end of the year given the fact that they're going to have to do it anyways if there's any other accrual that they need to make and if they need to break out between short-term and long-term portion of the loan. That's one method you can use. Another method you can use, which is the method that we did in our practice problem, is that we ask our accountant to help us to put the loan on the books if it's complicated, and then we ask our accountant to create an amortization schedule such as this, if necessary, which breaks out each of the loans according to the terms of the loan document and properly breaks out the interest and principal so that every time I make a payment, I will properly break out the interest and principal getting us to the proper loan balance after each payment. That's what we've done here. So you could see this 69, 870, 813 ties out to what is here, 69, 870, 813 for that particular loan. So if we do that, that's great. However, there's still another issue with it, and that is that there could be a short-term and long-term portion of the loan that needs to be broken out because the short-term portion represents, or current liabilities represent, things that are due within the next year. The long-term portion are things that are after a year, and if we're paying monthly installments, there's going to be a short-term portion and a long-term portion. So part of this loan should be up here and part of it should be in long-term liabilities. I don't typically want to do that internally. I don't want to do that myself as I'm making payments because the short-term and long-term portion is going to change with every payment. That's too tedious to do. So typically we'll do that at the end of the period, the end of the month, quarter, or year in the adjusting entry process. So even if you're tracking your own and breaking out the interest and principal, you may still need your accountant at the end of the year or yourself, if you're doing the adjusting entries, to break out the short-term and long-term portion of the loan. Now note that when you look at the short-term and long-term portion of the loan, that is a balance sheet account activity, whereas when we look at the interest, it impacts the income statement. In other words, the proper recording of interest will have an impact on the income statement. So you want to make sure to get that one right, no matter what type of entity that you're in, because in the United States, if you have to do income taxes, which you typically would, then the interest might be an expense or a deduction. So you want to make sure you get that right. The breakout between the short-term and long-term portion of a loan, however, doesn't have an income statement component. It's just breaking out whether it should be categorized in a current liability or long-term. So if you're just a small business that's doing this for tax preparation and only recording a schedule C, which is basically an income statement, you might not need to break out the short-term and long-term portion because you're not reporting it externally. You just need to do it for taxes on a schedule C. If you have a more complex return, like a corporate return as corporation partnership, you may still need to break it out just for tax preparation. If you're reporting externally to the bank possibly for a loan or something like that or to external investors, that's when you would want to properly break out the short-term and long-term portions. Okay, next thing to understand with regards to the loans. On the internal bookkeeping side of things, it's possible that we have multiple loans, right? Because certain industries could have a lot of different loans. So if you work in a construction business or something like that, rental businesses and whatnot, then every new piece of equipment might have a loan basically attached to it. In that case, you could have a lot of loans. So there's a couple of different ways that you can classify the loans when you're internally doing the bookkeeping. You could put them all into one loan account and then have the detail being broken out with the amortization schedules. And if you add up the balances and all the amortization schedules, they'll add up to the loan balance. However, that's probably not the easiest way to do it. What you probably want to do is what we have here, have a parent account for the loans, one account that you're doing internally to track the loans and then make subordinate accounts for each loan. I would typically do that in the current assets, but you can also put both of them into the long-term. But you only want one loan account, not breaking out short-term and long-term on the bookkeeping side. And then within the subsidiary accounts, you can list the loans possibly by the loan institution, the financial institution, Bank of America, for example. However, that's not always enough of a distinction given the fact that if you have multiple loans, you might be going back to the same financial institution for those loans. Therefore, the last four digits of the loan number might be the best way to distinguish one loan from another loan. So then I'm going to say it's Bank of America, last four digits of the loan number, and then put that in a subsidiary account to loan payable current portion, and then my other loan, Chase loan, last four digits of the loan number broken out into its own category. If I look at that internally, going to the first tab, I'm going to go to the transactions and then in the chart of accounts, we have then down here our loan payables. So current portion, here it is, here's our sub-accounts. So then when we do the adjusting entries, there's a couple methods we can do for the adjusting entries, right? I could make one loan payable as a long-term liability and then break out the long-term portion of each loan, but it's probably easier to see to have the same kind of breakout on the long-term side of things, meaning I'm going to make a parent account and then put the subordinate accounts underneath it for the long-term portion to break those out in a similar fashion. So also note for external reporting purposes, this works good because I don't need to report these two sub-category loans for external reporting. That helps me internally. For external reporting, I might collapse these and just show the balance of loan payable for the current portion. So that helps me out for my internal bookkeeping, helps out the adjusting department when we do the adjusting entries to tie out the proper amortization schedules and makes it easy to then create a collapse for external reporting. Okay, let's go back internally and then I'm going to mirror this process for the long-term portion of the loans. So I'm going to make a new loan account. To do that, I'm going to say it's going to be liabilities and we're going to say it's going to be not a current liability this time, but rather a long-term liability. So it has here long-term business loans. That might be a good one to use. Let me close this out and check that one out. Let's go down here and just look at it just to check it out. So we've got long-term, let's use that one. So we've got one already. So what I'll do is I'll use that and I'll put the subsidiary accounts within it. So I have two subsidiaries on the short term. So let me see if I can copy this and then I'm going to say, okay, new liabilities. And this one's going to be a subsidiary of that long-term business loan. And there it is. And then I'm going to say, I have to do something different here. So I'm going to have to put like long-term next to it. Otherwise the name will be exactly the same. And then I won't put a description. This is what it looks like. So I'm going to say, okay, save it. And so now we've got that long-term loan and that one as a subordinate to it. Let's do the other one too. I think one of these only has a short-term portion to it, but let me just show you what it would look like on the register. New liabilities. And this is also going to be subordinate to long-term loans. Boom, I'll say LT for long-term to make it different. So it will allow me to put the name in there and then scroll down. And so now we've got the loan payable current and mirroring that the loan payable on the long-term similar format. So now I just need to determine how much of the loan is long-term versus short-term. For that, we need the amortization schedule. So this is something that when you get the loan, they might provide you an amortization schedule, but they don't necessarily need to because if they give you the information in the loan terms like the interest rate, the periods that are covered and the payment, then you can derive your amortization table. So when you take out the loan, you might want to do that or contact your CPA firm to help you to create the amortization schedule or again, just record everything on a cash-based system, make sure that you have the terms of the loan and give that to your CPA or accountant at the end of the year. So at the end of the year, they can do this whole process, right? They can record the transaction properly. When you put the loan on the books, make any adjustment that needs to be made. They can do any adjustment for tax versus book purposes if there's a difference between the two because of differences in the amortization schedules. They can break out the interest according to the amortization schedule if you just did it on a cash-based method and they can break out the short-term and long-term portion as long as you have the structure set up properly so that they can clearly identify each loan and you provide them with the documentation and you have someone that knows what they're doing. All right, so let's put our curse. I'm going to add a column here. I'm going to insert a column and then I'll do another one. Insert another column. And so if I look at this then, this is where we stand at this point in time. And so we're going to say, what's the current portion at this point in time in the February we're imagining for this loan? Well, you might say, well, we're paying this amount 1358 and there's 12 months into the future. That's what we're going to pay. So the current portion should be then the 1630475. That is not exactly right. Why is that not exactly right? Because that includes the interest. And it's like, well, yeah, but I've committed to the interest. I have to pay the interest. So that makes sense. I should include that. However, no, that would be like saying I signed a lease for my office building and I'm going to be paying 24,000 in next year for the use of the office building. But because I signed the lease this year and I'm committed to it, I'm going to expense the 24,000 this year. No, you can't do that because you didn't use the office building. So even though you've signed the lease and have committed to paying that amount, you haven't actually incurred the expense because you haven't used the office building. The same thing happens here. It's just like rent. You have the purchasing power of the money. Part of that is going to go to the rent of the purchasing power of the money. Part of it's going to go to the decrease or repayment of the money. So you can't include the interest portion. So we can only include the principal portion, which gets a little bit messy because it's like, okay, well, then I have to add up the principal for the next 12 months, which goes from, so that would be equals the sum of, from here down, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12. Boom. So that means that we're going to say, okay, well, that means that the current portion is 13108. Or the other way you can think about it is if I make 12 payments, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, then this is where the balance is going to be at that point in time. So if I subtract this out, this minus this is going to be the difference, right? The 13108, 54, that we're going to be paying down in the short term. So this is the short term. And then I could say, okay, let's add one more column here, insert. So what's going to be the long term? Well, the long term is going to be equal to this amount, the full amount, short and long term minus the short term, which is going to be the 56769. The sum of those two, 6987813 is the current balance. This 56769, 56 matches this 56769, 56, which is where we will be after 12 payments. So notice it could get a little bit more confusing if the payments are happening in the middle of the month and you're saying, okay, now I have 15 days in one month versus 15 days in the other month. I won't get into the weeds on that here. I'm just going to, this is, but this is generally the idea, right? So that's going to be it. So that's going to be our adjusting entry. Or at least this is where we will be after the adjusting entry is done, 13108, 54, short term, 56769, 59, long term. Now, because we put the full amount, 6987813 in short term, that means that we're going to have to reduce the short term portion by the long term portion. So this is going to be the amount of the adjustment that we're going to be making, increasing the long term portion, decreasing the short term portion. So if I go back on over here, in other words, on the balance sheet, we can see that for this loan, everything is in current portion. So I need to reduce the current portion by the long term portion, which will leave me with the current portion here. So, okay, let's go. So we can do this with a journal entry, of course, but these are just going to have two accounts affected. So we could use the register. And because this is a balance sheet and balance sheet transaction, I could use either register, right? I could go into this register on the short term or the long term side, or I could go into the register up here in the short term side because they're both balance sheet accounts. We're in the Chase account, not the B of A. So I'm going to let's do this one here, the Chase one that already has something in it, which we're going to be decreasing. Let's open that register and then I'm going to say, drop it down, make a journal entry as of the end of the period because it's an adjusting entry 022924. And we're going to say that this is going to be an ADJ entry and it's going to be a decrease of, we're going to say this amount. It's going to be 5676959. So it's going to be 56759.59. 6959. There's a lot of fives and sixes and not fives, sixes and nines. This is, I'm going to get something backwards. I'm scared. This is 5676959. 5676959. 5676959. Okay. I think I have it. Okay. So then the other side is going to go to loan payable long-term portion for the Chase. There it is. Boom. No problem. So let's save it. That should bring the balance into, so let's go ahead and let's look at it first. Let's go into here and edit it. So now it's in journal entry format. I'm going to copy the description, put it on both sides. So we can see here that it's a debit. It's a debit here to the current and a credit to the long-term, a credit increase in the liability. Debit's decreasing liability. So we're decreasing the short-term with a debit, increasing the long-term with a credit. Okay, let's save it and then close it and then go to the trustee, go to the balance sheet, run it and see if it did what it's supposed to do. Going down to the loan payable. So now we have the Chase loan. The current portion is at the 1310856. That ties out to the 1310856. So it looks good. And then the long-term portion is at 5676959, that crazy number, 5676959. So we have broken out. Now the other loan is all short-term. So we only had four months. So I don't need to break that one out between short-term and long-term because it's all short-term, which again is another reason why I like to put all the loans in the current portion to start out with current liabilities because all loans will have a current portion to them, typically if they're installment loans. However, only some loans will have a long-term portion. Now you might argue that this is not the only type of loan that you could have because business loans aren't always like a mortgage. So you could structure a loan. You might commonly find oftentimes actually in businesses loans where you don't pay anything off until like the end of the loan or something, which is 10 years later or something like that, in which case the whole thing would be long-term until it's coming close to due. So but that's what I typically do. I think it's usually easier to kind of put it all in the current portion and then break out the long-term portion. So that is that. Now obviously this is going to be ugly for the bookkeeper because now if I leave it like this, then the next time I make a payment, it's going to be an issue because now it's like, okay, which account should I be making the payment to? The short-term or the long-term portion? You would think I'd have to make it to the long-term portion here, but it's not like I can maintain the proper short-term and long-term portion after the second payment. I would have to make another journal entry every time I make a payment. So that's why we want the separation of duties. That's why we're going to do a reversing entry that will just be the opposite next time. We'll reduce the long-term portion, put it back into the short-term portion so that on the bookkeeping side, we can manage each of our loans as subsidiary accounts in their own account and track exactly what we're doing and then just break out the short-term and long-term portion on a periodic basis at the end of the month or quarter or year so that we can do whatever we need to do with it, which might be taxes, which again, if you just have a schedule C, you might not even need to do that because you don't need the balance sheet. I mean, because the income statement is not affected by this journal entry, which is what is needed for the schedule C or if you have a more complicated tax return, you might need to break it out because there's a balance sheet portion of like a corporation, S Corporation, LLC, a limited liability possibly and or a partnership. And then if you need the external reporting for external users, shareholders, bank, then you might have to of course break it out for proper reporting of short-term and long-term portion. Obviously for internal purposes, you might want to do it as well so that you can do some proper cash flow management. But I'm just saying those are the options. Okay, so this is where we stand as of now. And so there it is. And then we're going to say, let's go to the income statement. Nothing new happened on the income statement. This was a non-typical adjusting entry in that most adjusting entries have timing accounts to them, a balance sheet and income statement account, income statement being a timing account. But this one doesn't. So that's why it's still an adjusting entry in that it's something that we can do periodically at the end of the year to separate and make it easier for bookkeeping processes versus financial reporting processes. But it doesn't have that typical thing we see with the adjusting entries of a balance sheet and income statement effect of them. Okay, so then here's our trial balance. This is where we stand as of now. If your stuff matches to this stuff, great. And then we will continue on then next time.