So if we have the loans on the book, you got to make sure that you broke out the proper amount of interest for the loan. And you may also need to be breaking out the short term and long term portion of a loan, depending on whether you’re using this for tax purposes or for reporting purposes. Because for example, this loan might have a short term and long term portion to it, which if we were to report something on generally accepted accounting principles we should then break out payroll is another area where you may have adjusting entries, it depends how you’re going to be putting this into the system.
QuickBooks Online 2021 adjusting entries and reversing entries introduction. Let’s get into it with Intuit QuickBooks Online 2021. Here we are in our get great guitars practice file focusing in on adjusting entries and reversing entries to do so opening up our reports balance sheet income statement and trial balance, we’re going to duplicate the tabs up top right clicking on the tab up top duplicate, we’re going to do this two more times, right click on the tab up top duplicate, right click on the tab up top duplicate, then we’re going to be having our trial balance on this one to the far right, then we’re going to have the balance sheet and then the profit and loss income statement or P and L.
So on the one to the far right, we’re going to go down to the reports on the bottom left, then we’re going to be selecting in the search field for the trusty t be that trial balance, typing in here trial balance, there we have it. So let’s be opening that up, I’m going to put the range change up top from a 101 to 120 228. To one, run that report, close up the hamburger up top hold down Control scroll up just a bit to get to that one to 5%, which is the perfect viewing percentage in my opinion.
Next tab over to the left, we’re going to go down to the reports once again, this time opening up the P and L the profit and loss otherwise known as the income statement, then we’ll do the range change up top ending at once again, the O to 28 to one running that report, closing the hamburger one more time we’re going to do this process go into the tab to the left to do so down to the reports on the left hand side, we’re going to be opening up the good old balance sheet, the balance sheet report range change up top Indian same point that being the end of February Oh 228 to one. And then we’re going to run that report as well close up the hamburger.
Now we’re thinking about the month end, adjusting entries and then the reversing entries process. Now there’s a couple things to keep in mind. When you’re thinking about this process. One, what is the process designed to do? The process is designed to be correct or make the financial statements correct on whatever basis we are using. Most traditionally, that being the accrual basis, but possibly for some people, and you might be adjusting it to a tax basis or something for a year and purposes periodically, either at the end of the month or the end of the year.
Meaning there’s going to be a difference between we’re thinking of a line in our mind between the data input the normal just day to day data input, and then adjustments we might make at the end of the time period to make it our financial statements correct. We’re kind of doing any last minute adjustments that need to be done to make our financial statements correct. on whatever basis we are using traditionally accrual basis, but possibly do a tax basis depending on what our needs will be.
Now also note that when you learn accounting, when you start to go through accounting and learn accounting, you’re usually focusing in on large companies that possibly have rules such as generally accepted accounting principles applied to them, because they’re going to be regulated in some ways, which may not be always applicable to smaller companies. If you are a smaller company. In other words, you may not be doing the adjusting entries like monthly, you might not have as much need to do the adjusting entries, you might do them basically yearly.
And you might be doing them not in accordance with accrual or generally accepted accounting principles, you might be doing them to tie out for your tax preparation needs. So you still might have some of those adjusting entry needs. But it might not be exactly on the same basis that you might have for larger companies. And you might not be doing it on a monthly basis, you may be content to do it basically on a yearly basis. You might not be doing it for the presentation of your financial statements to third party individuals, because you’re not giving them to third party individuals, but rather to get your financial statements correct for the tax preparation that would happen at the end of the year.
There’s also some options with regards to who should be doing the adjusting entry process, I would think of it no matter who does it as basically a separate process in your mind, it’s going to be something that’s going to be separate from the data input. In other words, if I go on over to our flowchart in the desktop version, you don’t need the desktop version. To follow along, just want to look at the flowchart. When you think about the normal data input process, you’re thinking about the input of the data that’s being used to create the financial statements that’s being done within each of these cycles.
The vendor cycle, the customer cycle, the employee cycle with the use of primarily the forms, the bill forms, the pay bill forms, the checks, the invoices, the received payments, those are the data that’s being put into the system, and that’s going to be done through the whole month or a year. And that’s going to be the normal accounting process, then at the end of the month or year, and this will happen as of the cutoff date, either the end of the month,
or the end of the year like 1231 end of the year, we’ll enter the adjusting entries to make things correct on whatever We are using as of that point in time so that we can then display the financial statements either to a third party for giving them to someone else, such as investors for a corporation or for our needs for those financial statements, which may be tax preparation needs. So if we’re talking about a company, then I would think a bit about this data input process as the normal data input. And we would like to the larger the company gets to delegate that data input to more people.
And make that process as streamlined as possible, we want to make logistically the process of data input as streamlined as possible, and then somebody else typically on a monthly basis, or yearly basis, making then those adjusting entries. However, if you’re a bookkeeper, or if you do your own books, and you work with a CPA firm, especially if you’re a smaller company, and you basically need adjusting entries for tax preparation purposes, at the end of the year, it’s quite possible that you can put your information into your system, and possibly discuss with your accounting firm or your tax preparation firm, what kind of adjusting entries may be needed.
And then they can basically do some of those adjusting entries or make the necessary adjusting entries on whatever basis and whatever time period you need either monthly at the end of each month, or possibly just simply at the end of the end of the year, either for financial statement purposes, or just for the preparation of a tax return. And for bookkeepers and for small companies. But for bookkeepers as well, you can set up really good systems that way, if you know the accounting firm that you are working with, and you’re basically saying, hey, look,
I’m going to set up my books, I’m going to use the bank feeds possibly, I’m going to work with a particular type of customer. And possibly I’m going to lean more towards a cash basis system in that. And then I would like you then to do the adjusting entries, you the CPA firm you the tax preparers on a yearly basis, take my information for the clients that I have possibly adjust them to the needs that they have possibly tax preparation needs, so that then you can prepare the tax return. And that’s a really good separation of duties because then the bookkeeper can can pick up their clients on a cash basis.
And they can basically then work with a CPA firm partner up with a CPA firm, possibly not working in the same partnership, but have a good working relationship with them. And then allow them to pick up the tax work and do the adjusting entries. Oftentimes, the CPA firm when doing if they’re doing a you know, a good job of the tax preparation will still need to do adjusting entries at the end of the year, even if the bookkeeper tries and attempts to do the adjusting entries themselves. So sometimes he would actually simply be easier to just tell the accountant Hey, look, I’m going to enter this, this is the way I do it.
This is the way it’s going to look. And these are the adjusting entries we typically need. And I would like you to make those conversions at the end of the year. And then let me know about them. So I can enter them on our side or do whatever we need to do from there. So the basic idea of the adjusting entries then will be that whoever’s doing the bookkeeping, the accounting department or the bookkeeper and whatnot is going to want to set up the system to make the logistics as easy as possible, I want to make the data input as easy as possible when talking to somebody else.
Or if I’m hiring someone else to do data input, I would like to set it up so that they don’t, they don’t need to know a whole lot to just do the data input so that we’re more easily able to to pass on this and delegate that information or delegate tasks out. So if I have to sacrifice then moving from a perfect accrual system, to something that’s going to be less than perfect accrual, but logistically easier, and then I can make a periodic adjustment periodically, when we present the financial statements, say at the end of the month or the end of the year, that could be a good, good policy to do.
For example, payroll is complicated in and of itself enough. So the fact that we could have a cruel like timing differences from an accrual basis to when the pay periods are being paid, is it’s not worth it for me to try to fix that every time we have the pay period, most likely, it’s most likely worth it for us to process the payroll that the payroll department worried about payroll, the payroll deadlines, the payroll cut offs, and then just simply make an adjusting entry at the end of the month, or the end of the year to for the accrual basis or tax basis that needs to be done in that format. So that’s the general idea.
So what we’re gonna do is we’re going to make the data input as easy as possible. And then if we have to make an adjusting entry to adjust to whatever basis we are on tax or accrual, or whatever it is, we make those adjusting entries. And then if we need to make a reversing entries to get back to where we were before to make it as easy on the bookkeepers as possible. We will then enter those reversing entries. Reversing entries are often what people miss.
Because Because if you’re like a CPA firm or something, your goal is to get the taxes done, you enter the adjusting entry so that you can get your job done. Then you give the information back to the to the bookkeeper. And you might if you enter those adjusting entries, you might have confused them right because some of them should be reversed to bring them back to where they were so they can be on the same logistical Which is working well, and then just make the adjusting entries periodically.
So we’ll talk about the reversing entries, that could be useful to put in as well. Let’s go back to the online version here. And let’s just think about these adjusting entries. Now we’re going to think of it as an adjusting entry at the end of the month. Notice that we have entered two months of data, we’re not going to do adjusting entries for the end of January. Although if you were to display your financial statements monthly, then you would want to do these these adjusting entries monthly. If you want to compare from month to month, it would be best to do the adjusting entries at the end of each month.
But like I say, many small companies may not do the adjusting entries monthly, they might basically do it yearly, they might wait till the end of the year, it might not be worth their time, for the added information provided by the adjusting entries, versus the time it takes to do them, then they might just do it at the end of the year because they’re not giving their financial statements to anybody else. They’re not distributing them to stockholders. If it’s a sole proprietorship, you’re not looking for a loan or something like that from the bank, you don’t need to give outside people your financials, you need to put the numbers together yearly, possibly for tax preparation purposes.
So it depends company to company as to whether you will do these adjusting entries on a monthly basis, or yearly basis, we’re going to do it at the end of February so that we don’t double up our adjusting entries and have to do them, you know the same kind of process twice. So we’ve entered two months of data, we’re going to do the adjusting entries as of February, the adjusting entries are always as of a point in time. So we want to make things correct as of the financial statement date, in this case, February 28.
That means that I’m not so worried about the middle of February, I’m going to have some things that I recognize will not be on a perfect accrual basis before that cutoff date. But February 28, is when we’re going to be closing the books and I want to make sure the financial statements are correct as of that point in time, because that’s when theoretically I would be presenting the financials to somebody else. So that’s what we’re trying to do make them correct as of a point in time.
And recognize that the day before that the day before the 28th, they will not be perfectly correct on an accrual basis. And that’s what we accept as part of the system to make the logistics as easy as possible. So then if we if we go down here, most of the adjusting entries are going to be timing differences, meaning they’re going to have one balance sheet account and one income statement account. And let’s just think about some of these accounts on the balance sheet and what type of adjustments might be there.
The cash account is typically not affected on the adjusting entries. Why? Because cash should be reconciled, we’d reconciled cash cash should be correct. adjusting entries are typically things that have to do with timing differences, and the cash should be already already adjusted. So we’re usually dealing with something other than cash, accounts receivable, we might have an adjusting entry for accounts receivable, most of the time, those cases would take place in one of two ways.
One, we have accounts receivable related to us entering data into an invoice or something like that. But billing someone for example, the bill went out the invoice went out after February, but the work was done before February. So in that case, we should have entered the invoice before February. But because of our billing cycle, we didn’t get around to invoicing because we only invoice every two weeks or something, you know, we didn’t invoice until after.
So we should bring it back in. In that case, we should basically make the invoice before the cutoff date and bring the income before the cutoff date. So that’s one thing that could happen with the receivables. If we have a system where we have the deposits that we talked about a pre payment from a customer, and we’re using the system of a negative receivable to account for the for the prepayment, we’ll have to deal with that and put it to an undeposited funds Where should go so that we’ll talk more about that later.
So inventory inventory, you could have some adjusting entries related to the physical count of inventory, you might do a physical count of the inventory at the end of the year and see if your physical count ties out, of course to the inventory on the books make any kind of adjusting entry at that point in time. But if we’re on a perpetual inventory system, as we’re using here, then the inventory should be you know, recorded basically on a perpetual system. If you’re on a periodic inventory system, not tracking inventory through the system, then of course, you’re going to be updating the inventory periodically based on a physical account.
The prepaid insurance, any kind of prepayment means that we paid for something before we we got the use of it, and therefore, if we put it into prepayment, then we’re gonna have to determine how much of that prepayment for this case insurance was actually consumed. Make an adjusting entry, decreasing the prepaid insurance and then recording it to an expense account. So this is the prepaid insurance is a common example of that of that kind of process. You can have a similar process for pre payments for like software, or things like that.
Notice that this kind of deduction could if you’re gonna if you’re doing this for tax purposes, then you there could be a question as to whether or not it’s going to be deductible for tax purposes, right because if you prepaid for something for services that you’re going to get in the future But you paid for it on a cash basis, then you got the question of, can you deduct it since you paid the cash for it on an accrual basis system. And you might choose an accrual basis system for taxes as well, you can try to choose cash or accrual.
If you choose cash, there could be deviations and prepayments could vary on the tax code. If you choose the cruel, then of course, you shouldn’t be recognizing the expense until you consumed it, basically, then we’ve got the undeposited funds, this is basically cash accounts. So this basically would be grouped up in cash, these are funds that we have on hand that we have not yet deposited, then we have the equipment. So equipment represents large purchases that we had any large purchases that we had, we’re gonna have depreciation typically related to it.
So there may not be any adjustments to the equipment itself, or furniture itself, property, plant and equipment at the point in time at the end of the period. But we will typically have adjustments to the accumulated depreciation, which is something that typically will be calculated within the tax software. And this is one of those adjustments that even if you try to do it as a bookkeeper, the tax preparer will still probably have to calculate it, because they’re gonna have to enter all this information into their system anyways, to calculate the depreciation on a tax basis. And they may as well do it on a book basis if you want it on a book basis as well.
So this is one example of something where you’d say, you might just want to rely on the tax preparer at the end of the year and work with your tax preparer and say, Hey, you are the one that should do that adjusting entry, at least, and then tell me what it is so that I can put it in there so that you can use the tax software in order to do it. We then have the accounts payable, we could have a similar kind of adjustment to accounts payable that we did for the accounts receivable, a timing type of issue, but sometimes the accounts payable is all right, the credit card, I won’t go into the credit card, the sales tax, the loans are going to be items where we often have an adjusting entry as well.
But usually when we run payroll, we base it on the payroll periods when we pay the payroll not based on on the accrual concept. So we typically could have an adjusting entry for an accrual basis there. We also could set up some systems where we basically say, Hey, I’m going to use a third party payroll, for example, maybe I might just put the payroll in our books on a cash basis and then rely on a monthly or in urine basis for somebody else to adjust it to an accrual basis as needed. So there’s some different systems you can use for the payroll are the unearned revenue.
I might just put the payroll in our books on a cash basis and then rely on a monthly or in urine basis for somebody else to adjust it to an accrual basis as needed. So there’s some different systems you can use for the payroll are the unearned revenue. So if we got unearned revenue, we could have adjusting entries related to unearned revenue revenue that we money that we’ve received that we have not yet earned yet we might need to record the earnings of it and then the equity section so those are just a kind of a rundown a recap of some of the some of the common kind of adjusting entries we might have. We’ll take a look at them in depth in more detail, at least in future presentations.
So if we got unearned revenue, we could have adjusting entries related to unearned revenue revenue that we money that we’ve received that we have not yet earned yet we might need to record the earnings of it and then the equity section so those are just a kind of a rundown a recap of some of the some of the common kind of adjusting entries we might have. We’ll take a look at them in depth in more detail, at least in future presentations.