This presentation and we’re going to enter a reversing entry related to accrued interest. Let’s get into it within two, it’s QuickBooks Online. Here we are in our get great guitars file, we’re going to go down to the reports on the left hand side, we’re going to be opening up this time the trusty trial balance, we’re going to be typing in up top to find the trial balance the trial balance, and then we’ll find it and then I’m going to open that up. Then we’re going to change the dates up top, we’re going to change the dates from Oh 1120 to 202 29 to zero.
This is our cutoff date for the adjusting journal entries. I’m going to run that report going to right click on the tab up top going to duplicate that report. Then let’s close up the old hamburger. I’m going to hold down Control and scroll up a bit today 125. Now we’re looking at the entry that we hit we entered in place which was the accrual of the interest. So you’ll recall that we have this this loan over here this loan that’s a little less standard you’re probably less used to in with We had the interest that was accrued that we had not yet paid, because we’re not going to pay it till the end of the loan. So we accrued the interest.
Now I want to point this out that this this account, then is something again, we might want to reverse because it could bother, you know, it’s something that’s just going to appear on the financial statements in an account, we’re going to have this interest table, which if you give this information back to the accounting to the accounting department, like a bookkeeping department, you’re thinking of these two things being separate adjusting department or CPA firm doing the adjusting entries and the accounting department, then they’re going to see this 250 they’re gonna I wasn’t there before, I don’t even know what that is, right? If I go into that, then they’re going to go into it. They’re gonna say, Oh, it’s a it’s a journal entry.
It’s an adjusting journal entry. That’s what those adjusting department people did. And, you know, probably this account, they could just leave it alone for the most part. If I go back, it’s probably not going to bother people too much. Here. Why? Because they’re not actually gonna be Paying this off next month, right? They’re not going to be paying this off until the end of six months. So but but we’re still going to reverse it. And just I just want to point out when it what would be a problem? Because you could you could have the same kind of issue happening with with for, for example, this kind of loan. What if this type of loan? on our example here, we kind of assumed that the payment was basically made as of like, the end of the month? What if there was, you know, the payment was made in the middle of the month and we had somebody accrual happening in the middle of the month.
In other words, we could have accrued interest here that we would have to put on the books as a payable because time had yet passed. Yet, we have not yet paid it right. There’s an interest payment that we didn’t make until March. And the interest on it had accrued upwards and we had not yet paid it.
Now, if we were to accrue the interest then let’s go back over and think about what the bookkeeper would it would have to kind of do if they were going to make like the normal kind of interest payment then on this if they’re going to make a normal interest payment note usually What you would do for is you would you would make it in accordance, let’s go to this amortization table, you’d say that you’d be making this interest payment for the total payment amount decrease in the checking account, as we saw, when we made the payments on this loan, then you would allocate the 296 to the interest which we go to interest expense, then we would reduce the principle by the 1068.
So they’re going to say, Hey, I’m kind of used to that. But what if we had a crude and put on the on the liability this 292 91? Well, then if that was the case, they would they wouldn’t be hitting interest expense, they would have to reverse the 291. In other words, when to do this properly, the bookkeeper then when they make the actual payment on the loan, would have to reverse the interest payment payable as part of their as part of their recording of it. And, for example, on this loan, if they were to pay off the entire 50,000 plus the 250 you know, at the second payment if they were allowed to do that.
Then you would think the bookkeeper would probably think that I would say that they would say that they would make the payment cash going down by the 50,250. And then they would decrease the loan by the the total amount on the books for the loan, which is 50,000. And then the difference you would think would go to interest expense. But in this case, it’s not going to interest expense, it’s going to the interest payable. And so there could be then if the loan was out for a little bit over this, this time period, then it could be something greater than 250.
So then you’d have to reverse the interest payable when you pay the loan and record the interest for the current time period that wasn’t included here. So it would it confuses the payments, then it could confuse the payments that the bookkeeper or accounting department would make. So therefore, we’ll do the same kind of process. I’ll just reverse this will reverse this back out. And we’ll say hey, when you make a payment, just make it according to the amortization schedule here. Again, this one won’t happen until six months later when we pay the full amount. But when they do make the payment down here, after six months, we’ll have it reversed out.
So that they can just make kind of a normal payment that they would make at that point in time, which would be to pay for the 51 519. And then the difference would go to the, then they would pay that amount, then they would take down the principal by the 50,000. And the difference they would record to interest expense, and then we will adjust the interest expense periodically at the end of the time period to properly allocate the proper interest for at the end of each time period, which is which is not going to be the total when they recorded it’s at 1005 19 it should be 250 and year in period one month one to 51 and period two and one, two, and so on and so forth. And just know it again, in this case, I would probably leave it on the books until after After the end of the period is over and accumulate upwards and I but if it was a year end adjustment and we weren’t going to make another adjustment for a year, then then I would profit, then I would make the reverse in entry.
If it was something that was accrued in this type of format that’s going to be paid in the next period the next month in this case, then then I would make the reverse in entry. So typically, the general rule for me would be is if it’s going to be reversed. If they’re going to make the payment in the next period, then I’ll reverse it to make that payment process easier. If they’re not going to be paying the interest in the next period, I would leave it on, I would leave it there because I shouldn’t bug the bookkeeper at all because it’s they’re not going to make the payment until six periods later. But I just want to show the example of that reversing entry.
So then we’re going to go back over here we have the interest payable. You’ll recall when we put this on the books, we debited the interest expense and credit interest payable, we’re simply going to reverse that will use the will use the Ledger’s to do that or the the general The general ledger or the journals to do that got kind of hung up on my G’s there with the general ledger. So then I’m going to change the date up here to march 3 2,022nd. Just so I remember that because that’s when we’re going to enter the reversing entry as up and then we’ll jump back over here and see what happens with it. So we’re going to go back to the left, we’re going to be looking into our chart of accounts once again. So we’ll go to the count, counting down below, I’m going to hold CTRL down, scroll back down to that 100%, close the old hamburger. And then we are looking for that payable, which is going to be a liability type of account.
So it could be somewhere down here in the current liabilities. There’s the interest payable, that’s the one we want. I’m going to open up the register for it. And we then can see the adjusting entry down below. Now we’re simply going to reverse it. So I’m going to enter another journal entry. And I’m going to make this as of Oh 30120 and we’re going to just call this a reversing Reverse seen remember seeing in tree and this is going to be decreasing by 250. The other side go into the interest expense account, I’m going to type in interest expense. That’s the one right I didn’t put it into internet expense that put it to interest expense.
So I’m going to go ahead and say save. And then let’s go back over to the trusty TB child balance let’s freshen up the screen fresh in that one up so we can look at it much fresher and I’m going to close the hamburger hold down Control scroll up and get to that 125 and then we can see if we go down to the payable then we had the payable for the interest table now at zero. So if I go in, then we can see that as of the cutoff date, we had it correct. So our financial statements were correct at the 250.
Then we took it down For the reversing entry, so it’s no longer they’re no longer bothering the bookkeeper or the accounting department as of the time period when they’re going to get back into doing stuff, which is March 3, I’m sorry, March 1, the beginning of next month, going back to our report. And then scrolling down to the interest side of things, if we’re looking at the interest expense, we have the same kind of activity happening here. I went to the internet. I’ve got to choose that internet somewhere. And so I’m looking for the Oh, I put it down at the bottom interest expense because we put it at the bottom last time.
So there is our adjusting entry to make the interest expense correct. And then we reversed it as of the beginning of the next time period. So let’s take a look at that and one other format on this report. So they’re back to where it should be here. If I if I take this date back, back to the cutoff date, to 29 Then we have the payable that we need to report to be correct on an accrual basis here and the interest expense down below. If I then go to one day up the beginning of the next time period that more data is going to be entered after the reporting period. We don’t we don’t need it to be perfect on an accrual basis here.
We need it to be logistically correct. We have been removed it. So it doesn’t bother that just the data input process that’s going to be there on a logistic standpoint. Now let’s take a look at the profit and loss because this does result in something a little bit strange to the P and L, profit and loss. So we’re going to go down to the reports again. And we’re going to be opening up the P and L because this is this should be a little bothersome. This is going to be bothering people a bit, but that’s okay, what’s going to be all right, we’re going to open that up.
We’re going to go back up top we’re going to be changing the dates up top from Oh 101202 Let’s see oh to 29 to zero. I’m going to run that report. gonna close the old hamburger scrolling back up This is as of the end of our cutoff date, which once again, if we go down to the interest expense we have included then that to 50, which is proper because it has been incurred as of that time period. Scrolling back up, the funny thing, this is where the funny thing happens, be careful, be ready, we’re going to go to the first day of the next time period, March 1, and let’s just make it Oh 301202 or 30120, we’re going to start a new time period, the new month and run that report. And if we scroll down, we have this negative to 50. And it’s like what a negative a negative expensive.
We shouldn’t have it. I mean, you don’t really have negative expenses, they only go up in the positive direction. So the negative expenses is going to be funny. Why would that happen? It’s wrong. And yeah, it’s wrong. It’s totally wrong. Because again, we’re basically making it correct as of the cutoff period and then reversing it as of the first day the next period to not bother, you know, the accounting department. Now when I say not bother the accounting department, they, they’ll probably be bothered by this.
They’re gonna be like, dude, there’s a negative to 50 here. But we’re going to say, Yeah, but the the balance sheet is going to be right. And the next time you make a payment, then it’ll work itself out. In other words, if they were going to be making a payment over here, if they’re going to pay off this loan, which again, they’re not going to do for six months, but if they were paying it off, then then they can do their normal type of journal entry. And when they record the interest, for example, if they were to record the interest, the normal way they would do it here, they would, they would credit cash cash goes button, let’s say they pay the whole thing off by the 50,000. And then, I’m sorry, their credit cash by the 50,000 to 50. They would debit the loan by 50.
Then they would debit interest expense by the 250. If they were to pay it all off. When they do that, this 250 would net out, it would net out to zero because there would be no interest expense in the month of March that should be recorded. Because it was actually incurred in the the month of February. So in other words, when they make the payment, they can make it if it was this type of loan in accordance to their normal kind of schedule here, and they don’t have to worry about reversing the the adjusting entry, which would be resulting in a payable, the interest payable, they could just record it like they normally would. And at that point, then these two amounts will net each other out. And it’ll be correct at that point in time.
So in other words, this will be wrong until the next payment is made, at which point in time, it’ll reverse itself out. Again, if that payment was made in this time period, the next time period the next month, then it would reverse itself out here we have a bit of a strange situation in our case, in that it’s not going to be paid. And that’s why again, I wouldn’t really reverse it in that case, for the next time period. But if it was a just an entry for the year, I would reverse it and just get the idea of that. It’s going Going to be it’s going to be right as the next payment here on our purposes will make the adjusting entries at the end of each month and make it correct basically at the end of each month in this method