 QuickBooks Online 2024, reversing entry for unearned revenue or customer deposit, advanced payment. Get ready and some coffee because we're going to be like bookkeeping Einstein with QuickBooks Online 2024. Here we are in our get great guitars 2024 QuickBooks Online sample company five. 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 right clicking on that balance sheet to open a link in a new tab right clicking the profit and loss to open a link in a new tab right clicking the trustee TB to do the same tab into the right closing up the hamburger changing the range up top 010124 tab 0220 let's do 03 actually 033124 because we're doing reversing entries this time selecting the drop down month by month and run it tab to the right repeat the process hand boogie clothes range change 010124 tab 033124 tab drop it down picking up the months and run tab to the right close the hamburger change the range 010124 to 033124 dropping down to the months and run it let's go back to the balance sheet we're doing the reversing entries now remembering that adjusting entries happen at the end of the month or year typically as of the cutoff date in our case February 29th and they are to make the financial statements as close to the accounting method as possible as of the cutoff date usually an accrual method but it could be similar method for cash-based methods or a tax-based method in this case we've been looking at an adjusting entry last time for accounts receivable and the unearned revenue so just a quick recap on this one because this one is a little bit confusing and one that you're not going to see every time for many industries because many industries don't have an unearned revenue situation so this is an area if you are a bookkeeper that you might be able to specialize you might be able to say hey look i'm i'm gonna be able to manage well like a rental property that always has to deal with these customer deposits or these computer application type of situations that always get the money before they actually do the work and come up with a system 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 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 so that i can easily do their books and possibly specialize in those kind of areas this is has some potential for some specialization this is a desktop screenshot that we're using for the online software just so we can see the flow of the forms noting that on the revenue cycle at the end of the cycle or at some process within the cycle we expect money to be going up cash to be received in other words for work that is being done usually that happens from the arrows left to right sometimes we might just have a deposit form we wait till something clears the bank and then record it as revenue when we get it like a youtube youtube or something might do it that way sometimes we might have a cash register still on a cash based system like a restaurant where we get paid at the same point in time we do the work but we have to record it at the cash register and then typically make the deposits sometimes we have to do the work first such as a law firm cpa firm landscaping where we do the work and then see how how much we're going to bill for the work based on possibly the hours and the materials and then we'll have to track the accounts receivable receive the payment and then make the deposit noting that's most businesses that's the flow of most businesses some businesses it's going to be backwards where we get paid before we do the work and those businesses would include classically book problems would be say newspapers magazine sales where you have a subscription model more currently you're talking computer applications where you get paid in advance and then you're going to do the work in the future so technically what should happen is you get the money increasing cash but the other side should not go to revenue yet because from a revenue recognition standpoint you haven't earned it you received it but you haven't earned it also just want to point out here that if you're doing your your books for taxation purposes then taxation purposes might have a different threshold as to when you need to recognize revenue for taxes the tax code may well say i don't care about the revenue recognition principle if you've got the money in some cases i want you to pay us with it right the tax code might deviate from an accrual method in some cases in which case again you want to special if you're specializing in that area determine you need to determine are you doing the books primarily for tax preparation or for external reporting or for both and then what would be the best kind of accounting method to be using to accommodate the needs that you're that you're looking at but from a revenue recognition standpoint on an accrual basis we haven't earned the revenue so we would want to record it actually into a liability account which would be called unearned revenue or customer deposit typically however we saw from a bookkeeping standpoint it's easier to use accounts receivable oftentimes so let's jump over here see why that is the case noting that in accounts receivable this is the account that has the sub ledger tied to it so let's go to the tap to the right and open up a sub ledger right clicking on it duplicating it and then we'll open up the reports on the left hand side closing the buggy scrolling down to who owes you we're looking at the customer balance detailed report let's run it as of the cutoff date of let's see cutoff custom 022924 boom and and so you could see internally this is the document or form that's that's showing you the detail of what's in the accounts receivable not by date of transaction as the transaction detail report would be but rather by customer and so this customer is showing a credit balance a negative amount of 200 which works great from an internal perspective because if I'm communicating with Eric music I could tell them hey look you have a credit balance that we can apply to a future purchase but for reporting purposes it's understating the accounts receivable because it should not be a negative amount if we owe Eric music something it's not an asset it's not a negative asset it's a positive liability so from a bookkeeping standpoint what we said is we said hey look I'm going to keep the negative accounts receivable from a bookkeeping standpoint let's look at it internally by the way if I go into the internal sales area we could see that under customers and Eric music uh where where's Eric music that internally if they contacted us we could see clearly what is happening we're like yeah you there's the 200 credit balance it was created from from an estimate I can apply that to a future purchase so that's that's great internally but it it's it's it's not exactly right from a financial statement reporting basis so we let uh quickbooks do it this way from the bookkeeping perspective and then we just said hey look if I need to do an adjusting entry at the end of the year I'll do an adjusting entry and I'll just basically increase the accounts receivable by whatever customers have negative balances to it and put the other side into the unearned revenue account so it's proper for reporting purposes noting that this is not exactly the type of adjusting entry you see in a book problem in a book problem the usually the issue is that all the revenue is going into unearned revenue and then you need to determine how much of the revenue has been earned by determining how many newspapers have been provided usually on a monthly basis right you actually deliver the paper or you deliver the magazine or deliver the application and then you decrease the unearned revenue recording the other side to revenue as it has been earned you with quickbooks you might have that similar kind of problem you can you could still have that issue but you might actually be able to automate that to some degree because if you if you get paid in advance in a subscription model you might be able to then assign automatic invoices to apply to that payment to happen on a monthly basis so that it will it will then decrease either accounts receivable or possibly unearned revenue depending on how you set it up you know on a monthly basis so that issue is still kind of an issue but it might not be something that you need to do in the adjusting entry you might actually be able to automate that as part of your accounting process we have an another course or presentation on that or if you want to look at that in more detail but this is also an issue that comes up a lot of the times and that's this negative receivable also realized that these two accounts that were impacted with this adjusting entry are not classically adjusting entry things because both accounts are on the balance sheet usually adjusting entries have a timing issue one of the accounts being an income statement account the income statement account having to do with the timing in this case we have the classification of a negative accounts receivable versus a positive liability so that means that if you're a small business you you might just be doing this for taxes and there's no impact on the profit and loss and if you're just doing a schedule c for tax preparation you might not need to do the adjusting entry you might be able to get the benefits of having a negative receivable it's probably not going to mess up your internal decision-making process and you don't need to do an adjusting entry if you're just doing a schedule c because you don't need it for taxes and you're not doing any external reporting if you are doing a more advanced tax return or a more complicated tax return like a schedule c or a partnership then you might need to do the adjusting entry if you're doing external reporting for a loan bank audit then you would think you might need to do adjusting entry in this case so that's what we did we increased this one if I go into it we did an adjusting entry and if I drill down on it it looks like this and so there it is noting that I had to record a name to the accounts receivable account because QuickBooks will not let us post it without a name because they're trying to force us to have a sub ledger for accounts receivable broken out by customer that will still match and tie out to the the amount on the balance sheet so so we're going to have to to deal with that and so that's going to be our one of the issues that we will deal with now we have to do a reversing entry for this one because the idea here is that the bookkeeping side of things is great so I want to keep the bookkeeping side the way it is but I want to adjust it for external reporting purposes which we did here and then I want to get back to where we were before after so you think well maybe I could just delete that transaction but you don't want to delete it right we lose the audit trail also note internally that if I go into my customer over here we created a new customer and we put it down here in zzz your options whenever doing an adjusting entry for accounts receivable with a journal entry instead of using forms like an invoice or a payment form are that you could create another accounts receivable account that's an accounts receivable adjusting entry so that you don't mess up the accounts receivable at all but you can't make it an accounts receivable type of account because then it will still have a sub ledger so you could make an other current asset called accounts receivable adjusting entry and that way you won't mess up the sub ledger at all and you'll have an account just for your adjusting entries or you could use the accounts receivable and then add a customer but possibly create a new customer such as we did zzz customer so that it will be at the bottom of the list so all the ugliness from journal entries in the sub ledger will be in that area instead of in the actual customer detail or you can enter the transactions in the actual customer detail assigning it to the customer that that has the issue noting that you're going to have some messiness in the detail so let me show you what that looks like in zzz here's kind of the detail we had we entered this journal entry into a zzz customer so that's kind of ugly because it because an increase is usually an invoice that's why I made it into another customer let's reverse the transaction and I'll show you what that looks like so I'm going to go to the balance sheet I'm going to right click on the balance sheet and duplicate it so I can get back into that journal entry by drilling down on the journal entry so I'm going to pull that to the left close up the hand boogie I'm going to drill down on the accounts receivable for February and then I'm going to go into that 450 the journal entry I'm just drilling down to get to the journal entry because QuickBooks has this cool tool of reversing it so if I just reverse this one it'll take all of the accounts and do the opposite I'm making the debits credits and the credits debits which is exactly what we want with a reversing entry so I'm just going to say reverse it it changed the date to 3 1 has a new entry and then everything looks good except the description I want to now call reversing entry so I'll just copy that and put that down on everything I don't want it here there's nothing there so now we're going to decrease accounts receivable which is usually the form that decreases is usually a payment form so but we don't we're not having a payment here it's a journal entry right so we're decreasing we have to assign it to a customer or else QuickBooks won't let us post it we're not assigning to an actual customer but rather made up a customer called ZZZ so that it will be at the bottom of the customer list hopefully not messing up our our bookkeeping and then we have the unearned revenue on the other side decreasing unearned revenue taking it back down to zero reversing what we did so that the books were correct on an accrual basis as of the cutoff date of 229 February 29th the end of February and then we reversed it to get back to the process that works from the accounting or bookkeeping side of things with a reversing entry following the cutoff date on March 1st let's save and close it check it out so I'm going to go back here I'm actually going to close this one and go back into the balance sheet and then run it and if I go into uh uh accounts receivable here for March and then we see we have uh the reversal so here's the reversal the 450 if I go back to the prior period let's go to 022924 then we can see we put it on the books before so it's correct as of the cutoff date and then we reversed it right after all right and so I'm going to go back and then say exit and then on the other side of things the unearned revenue we put it on the books for February and then it's been reversed it's back down to zero in March if I go into March we see the 450 reversal if I change the beginning date to go back to 229 we see the input that was input at the end of February reversed at the beginning of March let's go back let's take a look at the sub ledger and so if I go back to the sub ledger here run it as of 229 uh uh well let's run it now as of 033124 so if I run it there now the ZZZ has these two in it so it's still kind of messy my sub ledger is messed up because I'd like these two to net out against each other and basically disappear the total is at the 22701 50 which is good and at least these are not in one of the customers like Eric music I don't have that ugliness up in Eric music but I think I could fix that first though let's take a look at the balance sheet we're at 22701 so this is at on the balance sheet 22701 let's go internally now and look at it inside here so I'm going to go back out of my customer and then back into it or refresh the screen is what I'm trying to do go back into ZZZ so now we have these two items so here's the the journal entry we made on 229 then we reversed it I would like this to be closed out with a green thing here so notice if I did this internally in Eric music this would look messy even messier than normal right now because it's a journal entry and it's not closed out to each other so it would confuse us internally but I can close it out against each other by creating a payment form so I'm going to select the drop down and select a payment form usually this would be the form we would use when we get a payment from a customer we're not actually getting a payment what we're going to do instead is apply what is in essence a credit balance to what in essence is a mock invoice kind of thing because this is kind of like an invoice an increase and this is kind of like a credit some kind of credit because it's a decrease so if I use the payment form I can use this to tie those two things together so ZZZ I'm going to do it as of 3 1 and I'm not going to add a payment method I'm going to keep it in payment to deposit the payment form usually decreases accounts receivable and puts the other side into some kind of either the checking account or this clearing account payment to deposit but in this case what I'm doing is I'm going to say accounts receivable is going to go up and back down again meaning I'm just tying together the fact that there's a credit balance a decrease in accounts receivable and a debit balance an increase so I'm just ticking and tying these two journal entries out so nothing should actually be recorded notice that this is something that most CPA firms might not know how to do because they understand things from a financial statement standpoint so they understand how to do the debits and credits and make the financial statements correct what they might not be so good at is this kind of thing to clean up the internal bookkeeping for the normal bookkeeping process so this if you're in a CPA firm this kind of thing if you can convince the partners who are usually older people that might not understand some of the dynamics internally and the importance of doing this kind of thing for the bookkeeper inside for internal purposes they're just trying to get the financial statements correct you might be able to add some value by pointing this stuff out okay but if I record this then we've got these are checked off now so now even if I recorded this transaction into a customer balance at least in other words if I did this in Eric music for example it wouldn't mess up the bookkeeper too much because these things should be tied out and closed out against each other even though it's still kind of ugly looking because you've got these journal entries in there in the detail so in other words if this was in an actual customer field and and it was Eric music and Eric music contacted us and we're trying to explain the audit trail to Eric music of his customer information invoices and payments it's going to be a little bit more difficult when I'm going oh well yeah well then there was like this credit but it's a journal entry that's weird I don't know and then there was this debit but at least they've been paid and and everything was paid out with those right that gets a little confusing you the bookkeeper would have to know that this was something that was done by the CPA I think it's better that's why I argue to put it in its own customer file so all the ugly stuff is kind of in its own customer file okay so if I go back then to to this one my report and run it again notice that the zzz is gone now because those two have been collapsed against each other we no longer have an outstanding journal entry so that actually works pretty nice 22701 50 still ties out to what's on the balance sheet for March 22701 50 all right so that's where we stand as of this point in time and if I go to the to the to the profit and loss this is where we stand and let's take a look at the trustee trial balance it's going to no impact on the profit and loss by the way we already mentioned that I won't go into that again trial balance this is where we're at so if you're following along and you're in the same place we are then great because I think we're in an excellent spot here I think we've been uh been moving along quite quite nicely so they're good work we leveled it up all right