 QuickBooks Desktop 2023, adjusting entry, depreciation. Let's do it within 2-its. QuickBooks Desktop 2023. 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. Here we are in QuickBooks Desktop. Get great guitars practice file. We started up in a prior presentation going through the setup process. We do every time maximize the homepage view, drop down, hide icon bar, open windows list, checked off open windows open on the left. Reports drop down company and financial P&L profit and loss, changing the range in 010123 to 022823. Let's also change it from the total to the month by month comparison and then customize it with the font in to the number in to changing up to 14. Okay. Yes. And okay. Then reports drop down again company and financial. This time the balance sheet standard and let's go to the customizing then change the rain from 010123 to 022823. That being the cutoff date changing it from the total only to a month by month comparison as well to the fonts and the numbers that as well to 14. Okay. Yay. Okay. There's the setup process that we do every time cutoff date is going to be the February 28. We're now focused on fixed assets which can also be called property plant and equipment depreciable assets or PP and E the concept we will use here will be the same as that used when we did the adjusting entry for prepaid insurance. But the fixed assets will be a bit more complicated because we're going to have to use other accounts like accumulated depreciation depreciation expense sub ledgers which will often be outside of our current system often in the tax software for example. Let's first take a step back and think about why we need the depreciable assets and then how can we organize this information from an accounting standpoint from a bookkeeping standpoint and from the year end adjustment and tax standpoint as well. Note that whether you're a large business or a small business you're typically going to have to deal in some way with the depreciable assets. Some of these adjusting entries you'll recall might be applicable to larger businesses but smaller businesses that are on a cash based system might not need them as much. But this is one where you're going to have to have some kind of depreciation some concept of it even though it is an accrual concept because it's so large that even the tax code will require you to post something as an asset as opposed to expensing it. So let's first start there. So the idea would then be that for example if I go to the profit and loss if I purchased something large like a building and I purchased it in January even paying cash for it $100,000 if I just expensed $100,000 building in January and then tried to compare January to February my performance would look far worse in January than February that's the accrual concept that's the point that's the problem we're trying to solve that shouldn't be the case because the building we purchased is going to be used for like 30 years and therefore I had this comparability problem if I just expense the whole thing in January that's the concept of a accrual concept that we're going to put it on the books as an asset and then we're going to be expensing it as we consume it or use it. We did the same concept that means we're going to put it on the books as an asset fixed assets similarly same kind of concept as we did with the prepaid insurance and then in the future as we consume the fixed asset the building the equipment then we're going to be expensing them as we consume them. Now here's where part of the problem comes in because it gets more complicated with the prepaid then with the prepaid insurance because with the prepaid insurance I know exactly how much I consumed I consumed whatever part of the coverage has passed has been consumed up till that point and therefore there's not really an estimate involved. I'm just going to write down the prepaid insurance that hasn't been consumed and I'm going to record insurance expense for the property plant and equipment that's not basically that's not the case because I don't know how much has actually been consumed about a building that's going to be used over the next 30 years. So I have to make some kind of estimate and the estimates of course will be flawed and one way we can tell the the the reader that I have an estimate and it's not exact is that instead of just decreasing the account directly furniture and fixture for example I'm going to have another account called accumulated depreciation which is called a contra asset account the net between the two will be the net asset amount so I'm going to record the decrease my allocation of the cost to the periods that have been covered in another account on the balance sheet called accumulated depreciation and then I'm going to record on the income statement rather than equipment expense which would be similar to what we did for insurance insurance expense we're going to record depreciation expense so that that whole estimation is going to be kind of a problem the names are a bit more of a problem then if I go back up to the balance sheet the next issue that we have is that and you might also think that you might also say well hey look the building could go up in value what if it went up in value well notice from generally accepted accounting principles we're usually just going to allocate the cost of what we paid to the building and if we if because we assume the building will deteriorate and therefore we can allocate the cost over a useful life even if we keep upkeep on the building we're going to expense the upkeep or improvements we can then put on the books as an asset for example now notice it could go up just because of where the building is located or something like that because real estate is a little bit different than other types of assets but the reason we don't we don't want to do fair market value sometimes or the argument against it is that we don't really know what the value of a building is until we sell it because a building is unique as opposed to some other things that we can keep more easily on a fair market value like investments and stocks for example that are on a publicly traded exchange because those are not unique because other stocks are trading every day for that price then those are easier things that we can keep on a fair market value and the property plants and equipment being unique in nature are things that you can't really do that as easily with that's the rationale for just allocating the cost as opposed to trying to take an appraisal all the time to get the fair market value there's arguments about that at these days but in any case so then the next problem is well how am I going to know how much to allocate well I have to use depreciation methods there's book methods that I could use designed to make your financial statements correct and there's tax methods used where the tax code is going to disrupt normal best practices in order to achieve tax goals whatever the legislation is trying to do so if you're a small business maybe you decide to keep your books on a tax basis because then you don't have to have two sets of depreciation schedules even though the tax basis is all out of whack for normal accounting purposes for internal decision making or you can try to do it on a book basis and have the tax code do something differently in either case the tax software is going to have to have all the detail of the data in the system so that it can record at least tax depreciation and then the tax software can also usually calculate book depreciation if you would like to use that as well so then as an accounting or bookkeeper you want to then talk to your tax professional because they're usually the ones that are going to be tracking the actual accounts that will be impacted on the tax software and that's usually going to be done the tax software usually calculates of course on a yearly kind of basis so tax software schedules might look something like this and so this is kind of ugly because I exported it to excel from a PDF but they usually have their categories here and then you've got all the detail in each of the categories so you've got your detail in here so notice that when you record something in QuickBooks I want to have enough detail so that I can identify what I recorded but I might not need the sub ledger like a sub ledger being similar to what I have for accounts receivable breaking out receivables by customer and inventory breaking out inventory by inventory item here I'm not going to give the detail on the sub ledger possibly but instead use the tax software to track that detail because there's going to be complex appreciation schedules related to it that means that I've got to give the accountant each period every new thing that we purchased not just in terms of the total dollar amount that we purchased but the actual items that we purchased in an identifiable way so that when I sell them in the future I can identify them and hopefully take them off in an easy and appropriate way now the other thing you want to be careful of is that you want to set up your bookkeeping accounts usually in the same categories furniture and fixture in this case machinery and equipment as with the tax software so that you can make your adjusting entries as easy as possible so we talked about in prior presentations when I went to the list when we look at our furniture and fixture and our machinery and equipment I tend to like to have separate accounts that line up to the categories on the tax software which is going to be like our sub ledger and then I'm going to have an accumulated depreciation account I put it in here as a sub account for each of those categories because the software is going to give us the depreciation by category now you don't have to do that you could have one accumulated depreciation account or something like that but typically this way you'll get a sub calculation per category you also might want to have like one account called furniture and a fixtures and then a sub account for the cost and a sub account for the accumulated depreciation instead of having this one be a sub account of the parent so there's different ways that you could set up the sub accounts but you want them to be able to easily line up to what's on the tax software now the other side of this is going to be depreciation which again you could have a separate depreciation account for each category that would be giving you more detail in your books but I don't you don't need to do that so I'm going to say the expense account I'm just going to keep as one expense account called depreciation expense which I'm going to put all different kinds of depreciation furniture machinery and so on too again that kind of is determined by how much detail you want on the expense side the income statement side of your books you could set up a depreciation account and then have sub accounts related to them for the types of depreciation for example if you so choose I think it's more important to do that on the balance sheet side of things because these are the permanent accounts as opposed to the income statement the temporary accounts so if I go back on over to what we have thus far on our report I just made up this report right so this is the stuff right here through here that was in there before 2022 so if I was to add that up there was 15,000 plus to 23,000 well let's just do it I'm going to get rid of the zeroes 15 plus 23 plus 12 plus 5 plus 2 plus 3 plus 7 plus 8 that's going to be the 75 that we started out with so if I go back into here and I go into my my furniture and fixtures and we're going to say you know that's kind of like the beginning balance that we had up top now when we buy stuff notice that that means the tax software already has is what I'm trying to point out they already have the detail for everything in 2021 and we don't do transactions and property plants and equipment all the time we only buy stuff every once in a while because these are large purchases so the new stuff that you purchase you're going to want to tell the tax preparer exactly what they were for the new stuff but you don't need to give them again the old stuff that's why even though this schedule is quite complex it's fairly easy to manage if your prior your data is correct because you only need to give your information that's the new information that you added in the current period and you want to give them the detail that they can put it on the books so that they can buy what is on the books hopefully being able to tie that to what's on your books so that is that so we're going to say close this back out close this back out and so then we'll just record these transactions so I'm going to say all right let's record it we've got this is the prior year depreciation by the way which adds up to 7500 so here's the 7500 right there and then we're going to say the current depreciation is here now that 14001 is for a year so if I'm going to record this monthly I've got to take that 14 I've got to take that 14 001 and divide it by 12 that would be the 116675 I'm going to say two months have passed January and February times two so I'm going to say that's 2333.5 so I'm going to go back on over and say okay do an adjusting entry I'm going to increase this account the other side is going to go to the depreciation expense now I could do that with a journal entry company drop down make journal entry or I could use the register for this accumulated depreciation account let's do that since there's only two accounts affected chart of accounts we're going to go down to here look at accumulated depreciation double clicking on it this account's a little bit confusing because the increases and decreases can seem backwards right because you're looking at a contra asset account which is decreasing the asset but it goes up with a credit usually so that's why debts and credits are actually make more sense but we're going to say as of 228 I'm going to say it's a decrease which is actually an increase to the account but it's decreasing the asset well that's why it's weird again 2333.5 the other side is going to go to depreciation expense they've already set one up I'm just going to have one expense account instead of multiple expense accounts even though I have multiple accumulated depreciation accounts and this is going to be ADJ entry so let's record it so if everything set up notice how easy the adjusting entry is that's it right that's going to always be the adjusted entry and then I could double check it balance sheet and then we can say okay it went up to 9833 50 which makes sense because if we go back on over where was it here that's going to be the 2333.5 current month depreciation plus the 75 we had in prior we had depreciated prior that's the 9833 50 now let's do the other category which had 388 so we'll just say okay same calculation we'll take the 833 not 388 divided by 12 times 2 and that's going to give us the 138 so 138 so I'm going to say alright let's go back here and then go to our chart of accounts and double click on the accumulated depreciation and this is going to be 228 a decrease of 138.83 and the other side is going to I'm just going to put it to depreciation expense again using one account on the income statement and this is going to be for ADJ entry boom and so then I can say okay chart of account close this close this balance sheet for the second category now has this amount so how we read this is we're going to say okay fixed assets I can close all the little carats fixed assets in total here and here for the and then if I open this up we've got the furniture and equipment book values as of the end of February if I want to see the detail of the book value I've got the actual cost that's what we paid for it minus the allocation of the cost thus far over its useful life gives us the book value same thing for the machinery and equipment the other side of that's going to the P and L profit and loss so I recorded the depreciation expense here you might say hey you should have recorded it's part of it in January you're right but again I'm trying to make things correct as of the period in February in this case so I'm not really trying to worry about when it was recorded in the year notice again if you were doing adjusting entries routinely monthly then you would want to of course do them each month but sometimes you might record this like at the end of the year for taxes in which case you're probably not going to break it out to a monthly amount but rather record them one time on a yearly basis and you know for tax preparation purposes or for your reporting purposes on a yearly basis as opposed to a monthly basis or something like that it depends on your needs so we're making it correct as of the cut off date which for the income statement is the two months ended of February is the general idea here so there it is and again you could make multiple expense accounts down here we put them into one expense account so you could make depreciation expense for the building versus the equipment versus the furniture or a parent account and then break those out I don't think it's as important to do that as to do that on the balance sheet because again these are temporary accounts that will roll into the retained earnings as opposed to the balance sheet accounts which are permanent which you're going to have to tie in to your reports now then you also probably want to take the totals which aren't totally up here and then you could double check the totals here to your total fixed assets and that's what you that'll give you your double check that everything has kind of been entered properly when you're tying out the schedules from the tax software to your books alright that's the general idea there let's see where we stand with our let's look at our reports again let's go to the accounting and taxes look at the journal report and I'll make this as of 022823 022823 customize it we'll take a look at the filter in options we want to look at just the transaction type and we want to see just the journals fonts and numbers let's bring it up to 12 let's go 11 this time because I don't have to do as much expansion work then so boom these journal entries these last two are fairly straight forward straight forward straight ahead on these two they're not reversing entries so we will not be doing a reversing entries these are permanent differences here's our reversing entries thus far this will not be included in one of them we're going to go to the reports drop down let's take a look at our trial balance from 010123 to 0228 022823 customize it fonts to the numbers change it to 16 let's do okay yes and okay there's where we stand as of the cut off date cut it off date don't want anything after this no straggly strings after it and then we're going to say let's say bring this out to 033123 here's as of the month after just to pick up the reversing entries that we've entered thus far to check your numbers on them as well