QuickBooks Pro Plus desktop 2022 adjusting entries and reversing entries introduction and get ready because we bookkeeping pros are moving up the hill top with QuickBooks Pro Plus desktop 2022. Here we are in our get Craig guitars practice file going through the setup process with the view drop down the open windows list on the left hand side company dropped down home page in the middle maximize into the gray area reports drop down company and financial looking at the balance sheet standard. Customize that report with a range change from
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Oh 101 to 2202 28 to two fonts and numbers changing the font bringing it on up to 14. Okay, yes, please. And okay. Reports drop down again company and financial looking at the profit and loss standard range change from Oh 1012202 28 to two, customizing the report with the fonts and numbers changing the font again, bring it up to 14. Okay, yes, please. And Okay, one more time with the reports drop down company or accounting and taxes. This time, the trial balance range change from Oh 1012 to 202 28 to two, customizing the report fonts and numbers changing the font bringing it on up to 14.
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Okay, yes, please. And okay, looking at adjusting entries and reversing entries as we do. So we want to keep these kinds of things separate, meaning the adjusting and reversing entry process separate in your mind from the data input process. Even if you’re the one that’s doing both of those processes. However, it’s often useful to think about two people doing those processes. When doing the data input, possibly the bookkeeper or possibly yourself as a business owner, for example, the other doing the adjusting entries, possibly a tax professional or a CPA firm at the end of the month, or the end of the year.
02:03
Now, even if the CPA firm or tax firm isn’t basically doing the adjusting entries or entering them into your system, they might be helping you in order to do them giving you information, for example, information related to like depreciation, for example. And in order to do adjusting entries, so you want to keep those two things kind of separate. The general idea with the adjusting entries is that we’re going to make the financial statements as accurate as possible as of a certain point in time, which is the point that we’re more likely to be displaying this information to external users who are dependent upon them.
02:37
That being at the end of the month, often, or at the end of the year, often, at the end of the year, if nothing else for tax preparation purposes, which might have different needs than no other reporting purposes. But you still might have some adjusting entries that are going to line it up for that purpose, as well. So let’s go back to the homepage here and just think about the normal data input process and see where the adjusting entry fits into it. Remember that the normal adjusting entry, or the normal data input process, the accounting department, or the bookkeeping process is designed to make the data input as easy and efficient as possible.
03:14
So that means these forms are set up so that we could just do the data input into the data input as easily and efficiently as possible. And the system creates the financial statements the balance sheet and income statement. Now there could be some areas and we’ve talked about some of them as we go and went through the data input, where the most easy and efficient thing to do from a data input side is not exactly in alignment with the reporting necessity, especially if you’re on more of an accrual type of basis.
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And that case, you might say, hey, look, what I’m going to do is try to put the data input in as easily as possible, noting that it’s not the perfect format for the reporting purposes, and then make the necessary adjustments on a periodic basis at the end of the month and or year, because that’s going to be easier than trying to keep it up like real time for reporting purposes. So for example, like the payroll, for example, is quite complex, the payroll periods are going to end on usually the end of the end of the week, bi weekly, monthly, or so on. And those might not line up with the, to the end of the period like the end of the month, for example.
04:25
So what you’re going to do there, it’s going to say, hey, look, I’m not going to mess with payroll, I’m going to run it’s complicated enough, I’m going to run payroll, the way payroll is going to run in accordance with its, you know, cycles. And then if there’s a difference between the cut off of the payroll period and the end of the year or the end of the month, for example, then I’m going to go in and make those adjustments on a periodic basis for reporting purposes, as is needed under those cases. So that’s like one example that might come into play.
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The other big one that even small companies will typically have to deal with even if you’re on a cash basis will be for equipment. You got large pieces of equipment you got, you have to do an accrual kind of thing, putting it on the books as an asset, because even if you are on a cash basis for taxes, you’re gonna have to put it on the books as an asset, and then you’re gonna have to depreciate it over time. And that might be something that you don’t do. You don’t depreciate it every day, for example, to make sure your books are reported properly every day, you do it periodically, at the end of the month, or the year, that’s the easier thing to do.
05:27
So note that if the if you’re a smaller type of company, it’s more likely that you do less of these types of adjusting entries, and more likely that you only need them to be adjusted at the end of the period possibly need way fewer of them, such as the depreciation entry, or possibly the payroll type of entry at the end of the year, getting help from a CPA or tax professional to do so. If you’re more on an accrual type of basis, and and or a larger company, then it’s more likely that you’re going to need more of these adjusting entries,
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more likely that you might have to show your financial statements externally for things like loans and whatnot. If you’re showing your financial statements to the bank, then they’re probably going to want it more in an accrual basis or more likely to want it on an accrual basis. And they might then want it you know, on a GAAP generally accepted accounting principles or something like that, and possibly reviewed by a CPA firm. So then you’re more likely to need these adjusting entries on a periodic basis. So let’s to think about the adjusting entries, we could go to, first the trial balance how it happens like generally, at the end of the period, oftentimes a CPA firm will take your your books,
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your trial balance, export it to a worksheet if you’ve learned accounting in in classrooms, you’ve probably seen an adjusting entry worksheet, which is basically a trial balance, then your adjusting entries, and then the ending trial balance, which is a worksheet that allows you to do your adjusting entries. From there, you would take that and put that into the accounting system. I won’t get into a lot of detail on that process now because we’re basically in a QuickBooks setting here. So I don’t want to jump on over to Excel. But that’s often what will be done.
07:04
If you need adjusting entries for like a decent sized company that’s going to be adjusting entries either for taxes and or financial statement reporting purposes, we have some courses that go into making a worksheet like that if you want to look at that in more detail. So But then let’s look at it from a balance sheet and income statement perspective. One way to think about the adjusting entries is just to go through the balance sheet accounts, and look at the ones that are more or less likely to need an adjusting entry. general rules for an adjusting entries, cash is generally not going to be one of them.
07:36
Because cash is basically taken care of after you do the bank reconciliation, cash is cash, it’s usually good, then we’re going to go on to non cash items. And if there is an adjusting entry, usually, the adjusting entries will have a balance sheet account and an income statement account because they have to do with timing, they have to do with a cruel kind of accounting. So accounts receivable, it might need an adjusting entry for a couple different reasons. One might be if you have a job call system, for example, you have a cut off issue, if I go to the Home tab, when you make this invoice for example. That’s when revenue is recorded.
08:09
But it’s possible that you make the invoice like monthly and you have to bill for for work that had been done prior to that. So it’s possible you have invoices that have been entered for in our example, after the cutoff date after February 28 in March for work that had been done in February, and that case, to be on an accrual basis, you’d want to pull that revenue back into February, which would be an adjusting entry.
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So you also could have if you had those deposits, which we talked about meaning pre payments, which in normal accounting, if you learned this in accounting would be unearned revenue you got paid before the work was done. But logistically we talked about I won’t go into a detail here. But logistically, you might have a negative receivable, so it would be easier for the accounting department to track in the system. And periodically then for display purposes reporting purposes, you would want to take that negative receivable out, we could see that for example,
09:06
if we went to the reports drop down, and we go to the customers and receivables and we go to the customer balance detail. So we got these negative amounts and a couple of customers right here for example. And Sam the guitar man shouldn’t have a negative receivable it should be a positive liability because it’s a prepayment that we owe back to them or we owe them the work or the guitar in our case. So we put it in there as a negative receivable because logistically that’s going to make it a lot easier when we make the invoice to tie those two things out.
09:38
But for reporting purposes, we would do an adjusting entry, increasing the accounts receivable put in the other side then to a liability. Then we’ve got the inventory asset, we could have a physical count of the inventory asset to kind of double check the inventory asset. It also could have a similar tie to the accounts receivable to see when we actually you know earned the revenue and so on related to our sales item up top, so we can have a similar kind of cut off issue.
10:04
Prepaid Insurance is a classic adjusting entry kind of thing. So for example, in insurance, you pay for insurance before you get the coverage, therefore, you’re paying in advance. So if you were, for example, to pay the whole insurance in one month, then it could cause a distortion. So for example, if I go to the profit and loss, and I break this out by month, now, if you pay for insurance month by month, then it’s not a big deal to just expense it, because it’s only a month kind of difference.
10:33
But if you pay like a whole year’s worth of insurance, say in January, and it’s going to impact the rest of the year, then it can have a significant impact on say, January versus February, because that that will, you know, it’ll be a distortion because you’ve really used the insurance over the two month time period. So the classical way to deal with that is to say accounting department, what we would like you to do is put all, every time you pay for insurance, you’re going to put it not into insurance expense, but into prepaid insurance. For example, here, we’re imagine that that’s a whole year’s worth of insurance.
11:08
And then we’re going to go in periodically at the end of the month or year, and reduce the prepaid insurance and allocate out according to the coverage that has been used. And so that’s a classic example of, of this kind of process where you can work with making it easy on the data input, they just report the insurance to prepaid insurance, they don’t have to worry about the expense and the breakout and whatnot. And then we go in and fix it, you know, periodically doesn’t mean the accounting department did it wrong, they did it right, they did it efficiently.
11:37
And then we go in there and make the adjustment that we planned to do in accordance with the system to make it more accurate as of the cutoff dates. Same kind of concept with the furniture and fixture. Also note as we go through this, we could have done this for January as well. But we don’t want to do two sets of adjusting entries, because be kind of a waste of time. So notice, you might do this on a monthly basis, we’re going to imagine here that we’re doing it as of February because maybe you need a loan at that point in time or something.
12:07
So you need to do your adjusting entries at that point, because that’s what the bank is demanding. And these are similar things you might need at the end of the year, it kind of depends on your needs for an individual business. Now the furniture and fixtures similar to the prepaid insurance, these are fixed assets. And these are ones that even if you’re a small company, a sole proprietor, you can’t get away, you might say, hey, look, I don’t need this stuff.
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I don’t need, you know, my my receivables, I’m on a cash basis, maybe I don’t have receivables, I’m not worried about the cut off, maybe I don’t have inventory. Maybe I pay my in my prepaid insurance or my insurance monthly, so I just expense it when I pay it, I’m not gonna have a problem there. But on the on the fixed assets, you can’t get away from it, because the tax codes gonna force you to deviate from a cash basis. In other words, if you paid cash, for a forklift, that cost $20,000 You can’t just expense the forklift because the tax codes gonna say you need to put it on the books as an asset and depreciate it. So in that case, then we’re kind of forced to do that now,
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we’re usually going to get help from an accounting firm to calculate the depreciation in that case, because it can be complicated. And you might have a difference between tax depreciation and book depreciation we’ll talk more about later, but you or them might have to then enter that information based on that calculation. And that would be you know, decreasing the assets in essence and recording the expense, allocating the expense over the time it was used, in theory in accordance with in a similar way as the prepaid insurance.
13:36
And then the accounts payable is usually fairly straightforward. The accounts payable, the VISA credit cards usually fairly straightforward if you’d been recording the debt as it goes. And then the loan payable, the loan payable might need a couple adjusting entries. For example, one adjusting entry, as we talked about when we entered this data is that you will need may be a short term and long term breakout. If you’re reporting externally, for example, and we haven’t been reporting it as short term and long term in as we enter the data into the system. Because from an accounting from a data input standpoint, that takes way more time to do that.
14:12
I don’t want to have to break out the short term and long term, it’s a lot easier for me to just look at, you know, the the balance per loan amount, and make sure that ties out to my amortization table. And I would like to at the end of the year or at the end of the month, if it needs to be reported externally to do an adjusting entry, breaking out the short term and long term portion to show externally, once that has been done, reversing it back in so that so that it’s back into one account, so that that way. That’s the point of the difference.
14:44
The logistic data input for me is easy on the data input side. And for the reporting side. We’re going to make the adjustment periodically, which should be a fairly easy process to do that on a periodic basis. You also might set up a loan situation where you’re saying Look at a CPA firm at the end of the period, I would like you to do an adjusting entry breaking out the short term and long term portion and the interest so that when I do the data input, I’m just going to record the payment to this loan account, making that as easy as possible.
15:16
And that could work quite well as as well as an adjusting kind of entry payroll, you could have an adjusting entry to payroll because the pay dates at the end of the payroll might not be at the end of the cutoff period. So if you pay people weekly, semi monthly, monthly, or bi weekly, then the pay period, the last pay period may not end on the 28th. And therefore you might have some of the payroll that was processed that was in the current month and some of it in the following month.
15:45
And you got to break out between those two to be more accurate with regards to the payroll that was actually consumed in the current time period. So that could have an adjusting entry sales tax is fairly straightforward typically. And then that’s, that’s most everything on these items and everything. When you adjust these balance sheet accounts. You’ll also be basically adjusting, you know, the income statement accounts related to them, accounts receivables tied to the you know, the revenue account, inventory is tied to the cost of goods sold account, so and the invoice and so on. And then of course, the insurance expense will have the insurance,
16:19
prepaid insurance is going to be the other side, the insurance expense, furniture and fixture or the depreciable assets other side will be over here on the depreciation expense. So we’ll go into those in a bit more detail. As as we go for some of the common kind of adjusting entries that you can expect to see. And as we do so, you always want to be thinking, Where do I sit in this? Am I the bookkeeper? Am I doing my own business on bookkeeping, or just in my bookkeeping, that’s doing multiple businesses.
16:46
If you’re doing bookkeeping for multiple businesses, then you might don’t want to be working with a CPA firm or tax firm, and have a good set of rules and say, this is the type of business that I work with. This is what I do, maybe you do just like cash, cash type businesses, and you say this is how I like to record things. This is how I record the loans. This is how I record the fixed assets. And then I would like you to make the adjustments, you know that need to be made.
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And even if you do if you do so, and you make it clear about what the line is between what you’re doing as the data input and what the CPA firm is doing, then, you know it being clear is the most important part so that each person knows what they’re doing. And then that can be a really good system to work with.
17:28
If you’re a bookkeeper, and you just do bookkeeping, and you’re not doing taxes, for example, and you’re not doing compilations or reviews, which are the higher profit margin items for CPA firms, then CPA firms oftentimes will love working with bookkeepers that will work with them like that and bring them in clients so that they’re not fearful of take of you know, you taking over their tax preparation in their reviews,
17:54
and still being able to provide them with the bookkeeping that hopefully lines in well with what they’re doing and you could get a good system working out with CPA firms in that way oftentimes. So in any case, that’s where we stand will start to we’ll start to enter some of these these adjusting entries shortly.