 QuickBooks Online 2024. Adjusting entries and reversing entries introduction. Get ready and some coffee because we're about to get the books on key with QuickBooks Online 2024. Yeah on key. 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 but that's okay whatever because our merchandise is is better than their stupid stuff anyways. Like our CPA six-pack shirts a must-have for any pool or beach time mixing money with muscle always sure to attract attention. Yeah even if you're not a CPA you need this shirt so you can like pull in that iconic CPA six-pack stomach muscle vibe man you know that CPA six-pack everyone envisions in their mind when they think CPA. Yeah as a CPA I actually and unusually don't have tremendous abs however I was blessed with a whole lot of belly hair. Yeah allowing me to sculpt the hair into a nice CPA six-pack like shape which is highly attractive. 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Here we are in our Geek great guitars two thousand twenty four quickbooks online sample company file we set up in a prior presentation opening the major financial statement reports like we do every time the reports on the left in the favorites were right click it on that balance sheet to open a link in a new tab right click in the profit and loss to open a link in a new tab and the same for the trustee trial balance the TB tabbing to the right closing the hamburger range change as we do 010124 tab 022924 tab like to see it on a side-by-side for the months and then run it to refresh it tabbing to the right close in the hamburger and change that range we're going from 010124 tab 022924 tab month by month breakout run it to refresh it one more time on the tab to the right close of the hamburger refresh or adjust the range 010124 tab 022924 tab dropping down for the months and refreshing it again let's go back to the balance sheet we're now thinking about the adjusting and reversing entry process the adjusting and reversing entry process typically done at the end of the period usually being the end of the month and or the end of the year the purpose being to get the financial statements as close to the accounting method being used as possible traditionally that method is the accrual method however you might be using it for other methods as well such as the tax-based method so that's one of the things that we need to basically understand why do we have the adjusting entries and then which basis are we using and then how important are adjusting entries depending on the type of entity that we are in in other words if you were a large publicly traded company and you were presenting your financial statements externally to investors then you're typically going to need to be on the accrual basis of accounting and you will typically be doing adjusting entries at the end of each month so that and at the end of the quarters right because that's when you're going to be presenting the financial statements so that's going to be important for that purpose however if you're a small business you might be saying hey look I would just like to keep my books on a cash-based system and I don't need to be in an accrual based system and I don't need a whole lot of detail for my internal bookkeeping system the main reason I'm doing QuickBooks is to get the financials for my tax return preparation at the end of the year so in that case you might not be doing as many adjusting entries and you might not be doing the adjusting entries on a monthly basis but possibly on a yearly basis in order to get the financial statements correct possibly not using an accrual basis to adjust to but basically a modified cashed basis system if you're using the tax code and you're trying to be on a cash based system with alignment to the tax code you might have some other combination of reasons as well for the financial reporting such as providing the financials to external users like a bank in order to try to get loans or financing from the bank so that's one of the things that's a little confusing about the adjusting entries is just what's the purpose of the adjusting entries do I have to do all of the adjusting entries that would typically be in a textbook scenario do I have to do it on a monthly basis or possibly can I do it like on a yearly basis so we'll try to answer some of those questions by looking at each of the accounts on the balance sheet we will do that shortly noting that the accounting cycle when we think about the accounting cycle we set up this QuickBooks file that's the first thing that we would do if we're setting up a new company right we set up the file once we set up the file we then did the items that are necessary in order to get the financial statements up and running we set up our account settings and the users and then we set up the lists including the chart of accounts and the item list and then we set up our payroll our taxes for the sales tax if we needed that and our vendors and customers and employees once that stuff is set up then it's going to be somewhat cyclical that's why we did two months of operations and the cyclical transactions are typically found in the plus button and they are recording journal entries but not doing so typically with a journal entry format with debits and credits that we enter into the system but rather with the use of the forms so the forms of course are the things that are helping us to create the financial statements and we can think of these as cycles within cycles right the financials are running on a yearly basis and then you can think of it cyclically on a monthly basis most of the time and then we can think of the cycles within the cycles as well as being the revenue cycle the vendor cycle or or expense cycle or purchases cycle and then the payroll cycle now sometimes these cycles might have a a cycle that is different than one that ends perfectly on the end of the month or the end of the year and the question then is going to be well do I want to modify the cycle here so that it lands right at the end of the month and the end of the year according to the accounting basis that I'm using or would it be better to let the cycle do what it would naturally want to do and then make a periodic adjustment at the end of the year so that's the question that we are often asking so oftentimes we're going to say for example on the payroll cycle payroll is getting quite complex what if payroll doesn't land right at the end of the year do I want to try to do an adjusting entry within payroll which is going to complicate payroll even more typically not usually we're going to say let the payroll do what it needs to do let it follow the cycle that it is on and then we'll make a periodic adjustment at the end of the year or the end of the month in order to properly record things as of that point in time so that's going to be the general idea of the adjusting entries at the end of the month or year also note as a bookkeeper or if you're doing your own books or if you're a bookkeeper or even if you're doing everything your bookkeeper and you do taxes and whatnot then you still want to separate the duties in your mind and say say if I'm putting on my bookkeeper hat or if I am the bookkeeper in the situation then what stuff do I want to do internally on the bookkeeping side of things and what stuff do I want to do when I put on my my accounting hat or my tax preparation hat at the end of the year you might be working with a separate CPA firm they can help you out with the adjusting entries and that thinking about the separation of those two duties is really useful because then you can think about setting up an accounting system possibly that could be more in a cash based system possibly be more automated leaning more heavily on the use of the bank fees and then have a good CPA at the end of the year that knows what you're doing that can then do the adjusting entries necessary for whatever the needs of the business is whether that be taxes and or financial reporting at the end of the year you can also work in a payroll provider as well in that kind of system so if you have a good network a good team then a bookkeeper might be able to basically automate the system to the maximum degree being on a cash based system even though they still need to make adjustments to an accrual or tax based system with the help and the use of external payroll provider helpers as well as a CPA or tax preparer at the end of the year okay so let's think about the general idea of the adjusting entries basically usually a classic adjusting entry will not have any cash involved in it because cash is basically already been taken care of cash is the lifeblood of the business if we reconcile once we do the bank reconciliation then cash should be basically good to go and so the adjusting entries will usually have one balance sheet account and one income statement account and that's because they're usually timing differences and the profit and loss is the timing statement so the question is when should expenses when should revenue be recognized as it recognized in the proper period therefore you would think you would have an impact on the profit and loss however we will also see some adjusting entries that are of a nature where there's like two balance sheet accounts and we'll see we'll see a couple examples of that in our adjusting entries as well and those are not like classical adjusting entries but they serve the same purpose of saying hey the bookkeeper process is easier if we let the bookkeeper do it whatever this way right and then we make a periodic adjustment at the end of the year for the for example the accounts receivable with the unearned revenue if we record unearned revenue as a negative accounts receivable that's easier on the bookkeeper although not exactly right for the bookkeeping and it has two balance sheet accounts that we will adjust so there's that and then the reversing entries then are those entries to say hey look after I make the adjustment to make things correct as of the cutoff date in our case February 29th then I don't want to mess up the bookkeeper there's a reason there's a reason why the bookkeeper didn't make it correct already we're not correcting the bookkeepers errors we are consciously saying the bookkeeper is doing it this way because that makes sense and then we're doing our job at the end of the period making an adjusting entry as of the cutoff date which might be the end of the year or the end of the month in our case it's going to be the end of February because we have two months of data input and and then if that adjusting entry messes up the bookkeeper then I have to reverse it right I want to get back to where it's fine for the bookkeeper so the only reason I'm doing the adjusting entries for some of them at least will be that I want to fix the books as of the cutoff date to do the taxes and or external reporting and then I want to reverse it so that I can get back to the point where the bookkeeper is is on their normal cycle for whatever it is that I'm looking at all right so that's the general idea let's just go through some of these accounts and we'll talk about some of the ones that will have an adjusting entry for so if we go to the checking account we're not going to have an adjusting entry for the cash account because it's it's not classically an adjusting entry process once we do the bank rex we should be good on that the accounts receivable we could have a couple potential adjusting entries for accounts receivable remembering that accounts receivable is an accrual account it goes up when we invoice the client even though we haven't yet got paid for it so one adjusting entry from for this one would be for example if we got a if it was a job cost system for example and we build people like every two weeks or every month if if that is the case oftentimes what might happen is we get we have to count the time that we worked on on a particular job and then we'll bill out the time so that means that the work that we did possibly was in the prior year before the cutoff in our case February 29th but then we but then we didn't actually enter the invoice until March so in that case you would think we would we should pull the invoice back or the revenue back to the point in time we actually did the work in February that's one that's the classic adjusting entry kind of issue and and and just realized that when we look at these forms and this is the flow chart for the desktop that we're using for the online purposes just to see the flow of the charts usually when I enter an invoice that's when the revenue is recognized why because that's the form closest to the point in time the work has been done but it might not always be perfect because I might have actually done the work a month before but never got around to billing the client because I needed to track my time and then I enter the invoice a month later well on an accrual based method if we did the work before we should we should go back and and record the revenue when the work was done even though we didn't enter the invoice till a later point in time so that's one that's one thing that that could come up the other accounts receivable one is more of a quick books issue that's not a classic textbook adjusting entry and that's where we have the unearned revenue something that isn't always in every type of business but if we had a security deposit on say the guitar for example that we sell then we get the money before we actually do the work deliver the guitar and so that should go into a liability account of unearned revenue however if I do that then the unearned revenue is not connected to the sub ledger and of accounts receivable I can't track it internally so a lot of times it's easier to say I'm gonna make a negative accounts receivable account for a particular customer that customer having what we would call a credit balance and their accounts receivable and then if that credit balance is still outstanding as of the cutoff date I can remove it I can reduce the accounts receivable and record it as a liability periodically at the end of the year note that that's one that you might not always need to do for taxes because if you're just a small business recording a schedule C then then you just need the income statement possibly so so so we would we might not even need an adjustment if the taxes are the goal of the adjusting entry process and then we've got the inventory of the inventories being calculated on a perpetual inventory system so it should be good as long as we match it to like the physical count as of the end of the year to make sure that there's no shrinkage or anything like that if you're not using a perpetual inventory system and you're using a periodic inventory system then you would have to adjust the inventory periodically at the end of the month or year possibly being something that would happen if you have like a Shopify store or say an Amazon store and you're trying to be a bookkeeper and and basically do the bookkeeping as automated as possible and then possibly relying on a CPA firm or tax preparer to calculate the inventory at year in for tax preparation we have a whole another course or section on like Shopify stores and stuff if you want to check that out so investment accounts that I'm not going to get into detail on the investment accounts because usually these accounts are not going to be significant for the business unless you're in the business of investing in stocks and bonds that's kind of the holding accounts we'd have to adjust that for interest and dividends and possibly the change in the value of the stocks and the payments to deposit account that's a clearing account so it should be zero if it's not zero then you probably have a problem and that's not really an adjusting entry that would be a situation where we'd have to fix the problem of of something's not right with it with the payments to deposit for the clearing account the prepaid insurance this has to do with insurance being something that that is always something that we pay before we get the actual work for us unlike the phone bill so with a phone bill we actually get the use of the phone and then they bill us for it for the prior month so with the prepaid insurance however with insurance it's nature is that we have to pay for it before we get the service of coverage of the insurance so therefore usually or classically we would put it on the books as an asset instead of expensing it a lot of companies might not do that you might be able to avoid that if you're small business just doing this for tax preparation especially if you pay insurance monthly you might be able to just expense the insurance but if you pay for a year's worth of insurance that could start to distort the books so so you might want to ask your accountant about that to see whether or not you should be recording your insurance as a prepaid insurance or as an expense and then do a periodic adjustment at the end of the period to determine how much of the insurance was actually consumed noting that the easiest thing to do of course would be just to expense it when you pay for it so doing an accrual thing takes more time and so the trade-off is well it should be better reporting to do the accrual thing but it takes more time and the question is are you required to do to do the accrual thing for whatever basis you're working on whether that be tax basis or accrual basis for financial reporting and then we've got the fixed assets or property plant and equipment so this one's similar to the prepaid insurance but this is one that you can't really avoid if you're in the United States at least and you're doing taxes because the tax code is going to force you to do an accrual thing and most people kind of naturally see or understand even if we don't know accounting much that the fixed assets are a place where this has to take place meaning if I bought a building for $100,000 I can't just expense the building right if I just record building expense $100,000 what's going to happen I'm going to have a huge loss for the year or month that I put that bought that building and if I compare that to the next year or month I won't be able to compare my income statements because I'm going to have this huge loss even though I didn't consume the building in that month I only paid for it that's why the cash basis isn't the best basis for comparison purposes the cash distorts the ability to compare so we naturally would say well you have yeah you have to put that on the books as an asset if I bought a building it's an asset because I didn't consume it it's not an expense even if I expense it but that isn't a cruel thing same concept applies to prepaid insurance right if I paid for the insurance for a year in the future it's an asset because I haven't actually consumed it if I paid my rent a year in advance it's an asset because I haven't actually used the building right those are less obvious than if I paid for $100,000 for a building yeah that's an that's an asset or like a million dollars for that that's going to be an asset so then that once you have it on the books as an asset you're going to have to allocate the cost over the useful life which we call depreciation which you're typically going to need tax software to do so that's a classic adjusting entries you're almost certainly going to need help from the tax preparer or at least the tax software to do the adjusting entries quick books not typically recording or or calculating the the depreciation why because that would mean if you did it in quick books then you'd also have to do it in the tax return so then you'd have two depreciation schedules which would be very easy to get off out of whack the two not tying out to each other so it's better so it might be just easier most of the time to just say okay if I have to put it in the tax return I'm going to let the tax return calculate the accumulated depreciation and then do periodic adjustments for lowering the fixed assets and recording the other side to an expense so accounts payable accounts payable is usually you know pretty straightforward we could have cut off problems in terms of when the expense was recorded but it's usually pretty straightforward the visa account is similar to the checking account it's usually pretty straightforward if you're paying stuff with a credit card instead of cash then you want to reconcile the credit card which is pretty easy at the end of the period and then you should be good to go there the sales tax is is usually fairly straightforward because you're recording you know a liability as the sales tax accrues so we're not going to have an adjusting entry for the sales tax in our example here the loans is another area where we could potentially have a problem and that will depend on how we're accounting for the loans and we'll talk about when we get to the loans there's a lot of different ways that you can you can basically account for the loans the easiest way if you're trying to be on a on a cashed based system and then just to a periodic adjustment at the end of the year you might just say I'm just going to every time I make a loan payment record it to a decrease in the loan ignoring the interest and then simply ask your accountant at the end of the year to make an adjusting entry reconciling the amortization schedule to the books and recording the proper amount of interest so that's something that a lot of bookkeepers don't really you know think about that they what they can do with that because that could save you a lot of data input because the the loan payments are always going to change you can't just automate them otherwise the other thing to note about the loan is if you have multiple loans we probably want to break each loan out so it's as easy to calculate as possible and if you have a loan that's over a year long you can have a short-term and long-term portion of the loan which isn't something that you're going to want to record with every payment because that's going to be tedious so that will be another example of an adjusting entry which actually doesn't have an income statement on the side of it it's two balance sheet accounts breaking out the short-term and long-term portion it's also one that you might not need for a small business because if you're just recording a schedule c for tax preparation you only need the income statement so you might not need to break out the short-term and long-term portion for taxes you would just you might still want to think about it for internal reporting purposes for your own decision-making processes but you might not need to to do that you would need to break out of course the proper amount of interest because the interest would be deductible for taxes and then you've got the payroll payroll is another one where you you could very well have adjusting entries at the end of the period it's another one where there might be different options in terms of how you deal with payroll the easiest way from a bookkeeping standpoint would say hey look i'm not even going to do the payroll within QuickBooks we're going to have to pay more for it anyways let's pay a third-party provider to deal with the payroll and the human resources and then i'll just record the actual impact on the checking account as it hits the checking account on a cash-based system so i can automate the system using the bank feeds and then i'm going to ask my payroll provider to give the reports 941s 940 w2s w3 payroll register to my accountant or cpa tax preparer at the end of the year so he can or she whoever can just basically uh do the adjusting entry as of year end to properly break out the the the payroll taxes versus the wages and any kind of liability at the end of the period that's one way a bookkeeper uh could could deal with it or we can do payroll within QuickBooks in which case of course QuickBooks is going to be recording the liability according to to uh whenever we whenever we we make the payments however there's another issue with payroll and that is that the cutoff date of the payroll cycle might not end at the end of the period so for example if i pay pay people like every other week or something like that then the end of the period might not fall on February 29th the end of the month and that means that that that the payroll i don't want it i don't from a payroll perspective i don't want to record have to record half the payroll in one month and half the payroll in another month that would be tedious uh therefore we have an adjusting entry that you can do on an accrual basis method in order to account for that type of situation so we'll talk more about that later and then unearned revenue this would be similar to what we talked about with the accounts receivable noting that there's a couple different methods you might deal with unearned revenue which would only be in certain cases where you got paid by the client or customer before you do the work classic examples being like a newspaper company although again the legacy media is on its last lame leg and nobody probably orders a newspaper anymore unless they just like having some kid throw a worthless wrapped up basically paper brick at their house but it also is in the when you have any kind of subscription model so we when we have the subscription we could record it as a negative receivable and we also saw a method where we can break it out as unearned revenue the classic book example of an adjusting entry for unearned revenue is if we're in that subscription model we're going to record all of our revenue as unearned when we receive it because we haven't actually thrown a newspaper thrown through their window to earn the revenue yet so so once we throw the newspapers through their window we're then going to have to figure out how many how many newspapers we threw at them so that we can see how much revenue we earned and then we would reduce the unearned revenue by that amount and record the income as we earn it so we have two kind of issues with this unearned revenue that's the classic book unearned revenue issue and then the other is this issue where we have a negative accounts receivable being actually easier to to handle from a bookkeeping standpoint which isn't exactly correct because it's going to be understating accounts receivable and we should be recording it as a liability it would be understating so we'd have to do an adjusting entry for that we'll talk about that later and then the equity is usually fairly straightforward noting that the the the net income flows into equity automatically on a yearly basis so it's going to close out that's what QuickBooks does and then we're going to have the draws and the investments as equity those are things that don't automatically close out to equity so we do have to note in the equity whether or not these these owner investments and draws are are for the current year or year to date if we don't close them out that's okay we kind of have to know whether they're for the current year or the year to date for external reporting of the balance sheet though we usually would would close out these yearly to the owner's equity if it was a corporation the the owner's equity would of course be retained earnings similar kind of thing the owner investment would would be called the common stock that were issued and the draws would be basic would be the the dividends in essence and if it was a partnership we have the added issue of a partnership of having multiple partner accounts so we could have if there are five partners five partner capital accounts and then we have to actually track each of those partners in a similar way as we would track accounts receivable but instead of having a separate ledger tracking accounts receivable by customer we basically track it in the equity section right so we'd have five different uh capital accounts for the partners five different owner investment accounts five different draws accounts for each owner to try to to account for the book value to the owner because remember assets minus liabilities equals equity equity is total is the owner's claim to the books and if you have a partnership then the owner's claims to the books will not all be equal it'll be in accordance to profit sharing of the partner and their draws and their personal investments so you have to track it kind of like an accounts receivable that's why the the corporation is exact is actually a little bit easier a lot easier because because you don't have to do that you just say it's all equity and then we'll just break it out by a number of shares which are all equal units of that equity and clearly a sole proprietorship is easier than a partnership as well because then you only have one owner and so that's nice so that's the general idea we don't need to go to each of the income statement accounts because when we looked at those balance sheet accounts really the other side of the adjustment to the balance sheet accounts will be income to most of them right when we just accounts receivable the other side oftentimes would be income when we just the prepaid insurance the other side would be an expense when we adjust the furniture and fixture the other side would be depreciation expense right so sometimes it's a little bit easier to explain this more quickly by just looking at like the balance sheet accounts that we're going to adjust and because most of the adjusting entries have both a balance sheet and income statement accounts the other side will have an impact on income either income and expenses so we'll look at some of the made these major uh adjusting entries and we'll try to address them in more detail talking about how how the adjusting entry would be done when you might need a reversing entry and when you might need to do adjusting entries and when you might not need to do adjusting entries depending on the needs for your business or your client's business