QuickBooks Online 2022 adjusting entry prepaid insurance, get ready because it’s go time with QuickBooks Online 2022. Here we are in our gateway guitars practice file, we set up with a 30 day free trial holding down CTRL. Scroll up a bit to get to the one to 5% currently in the homepage, otherwise known as the get things done page.
If you wanted to change to the accounting view at something you can do by going to the cog up top switch to the accounting view down below, we will be toggling back and forth between the two views either here or by jumping over to the sample company file currently in the accounting view,
back to the get great guitars opening up a few tabs to put reports in by going to the tab up top right clicking on it and duplicating it back to the tab to the right to the left, right clicking on it, duplicating it back to the tab to the left, right clicking on it and duplicating it.
Again, as that is thinking let’s see where the reports are located in the accounting view back in the sample company file, which is in the accounting view. The reports are housed under this Reports tab.
If we go back on over to the business view, we’re in the second tab the reports are located and that business over view. And then closing up the hamburger, we’re going to be closing this thing that they keep putting there and then go into the balance sheet.
The balance sheet report is where we’re going, we’re gonna do a date range change from a one a one to two to let’s say, Oh 228 to two. This time, I’m gonna do a side by side, why not? Let’s hit the drop down and do a couple months side by side and run it. And the Feb, we’re of course focusing on Feb,
that being the cutoff date Feb. 28, we’re going to go to the tab to the right we’re going to go down to the business overview. Again, we’re in the reports close in the hamburger and then exit out this thing that they keep popping up here.
And then open up the Profit and Loss report that P and L we’re going to take this from a 101 to 202 28 to two that being the cutoff date, we’re going to hit the drop down make this by month and run it again.
We’ve got the Jan the Feb, the tote, let’s go to the trial balance the trusty TV on the tab to the right business overview again, reports again, close the hamburger again, and then type in up top trial balance to find it. That’s how we find it. That’s how I find it, you might want to make it a favorite. But I just type it in there. That’s what I do. This is going to go from Oh 1012 to 202 28 to two and run it.
Okay, let’s go to the first tab. Now we’re going to go back to the first tab, which is going to be our balance sheet. We’re looking now at the prepaid insurance account. And this is going to be an accrual concept. And it’s the same kind of accrual concept for the adjusting entry, as you will see with the depreciation.
So let’s first think about the the depreciable assets, the fixed assets, and then apply that same concept to the prepaid assets. Because the depreciable assets are an area where I don’t think you can really get away from having to deviate from a cash basis.
In other words, if you think about something like prepaid insurance, you might say, Hey, I’m going to put my books on a cash basis method as a small business owner, possibly. And I’m not going to deal with that whole accrual business.
But there are some things that you’re never really on a complete cash basis if your business is growing towards some amount of size. Because at least the tax code, even though it could primarily or often be set on a cash basis,
in some circumstances, is going to force you to deviate from the cash basis sometimes when there’s a substantial difference between when the cash was paid, and when you actually got used from the items.
And that’s most clear on the prepaid side with property, plant and equipment. So if I was to purchase like a building, for example, even if I paid $100,000 of cash for a building, I can’t just expense it straight off at $100,000.
Typically, because if I were to do that, you can imagine if I looked at the income statement, for example, month, one, month two, and in January, I paid $100,000.
And in February in this case, I did not but I still use the office building in February, it would look like January was a horrible month from a net income standpoint as compared compared to February. It wasn’t in reality, because what we did is make an investment that’s going to be benefiting future periods and therefore,
under an accrual basis method we should be to be fair to be trying to judge January to February, allocating the expense over the time that it’s being used allocating the cost over that time frame.
And so that’s the concept that we would be doing depreciation for which we’ll talk about in a future present. But that’s a little bit more complex form of just a kind of prepaid items.
The added level of difficulty is the fact that we’re trying to allocate a cost of something that we don’t really know what the fair value is. And there’s an argument about fair value should you report the building at fair market value, but that’s difficult, if not impossible,
because you’re not selling it on the on the market. And all the buildings are unique in nature, so on so forth, but same concept for the prepaid insurance, but you might be able to get away on the prepaid insurance side of things by saying I’m on a cash basis,
I pay insurance possibly monthly. So maybe I’m just going to be on a cash basis and expense the insurance when I pay it, as opposed to having a prepaid insurance.
But if you pay for the insurance, like a year in advance, or even six months in advance, for example, you have the same problem, in that, if you compare January to February, on the performance report on the income statement, and you paid for a year’s worth of insurance in January,
for example, in this case, that being 12,000 to this set of numbers, that would be a significant set of numbers, that would throw us into a loss on the net income for January versus February and making January it looked like
it was worse than it really was because the insurance that we paid should actually be allocated to the to the months in which the benefit was received. The same can be true with any other kind of prepayment, we could prepay any type of an item we wanted.
And you could see here why you’re kind of skeptical of a cash basis method to some degree. If you’re skeptical that people are going to try to manipulate things like the tax code could be a little bit skeptic code call of it right?
Because you can you can start to say well, why don’t I just prepay if I want to if I want to change what where I stand at this point in time? Why don’t I just prepay like my rent?
Why don’t I just prepay, you know, my, you know, my medical, like the insurance or something like that when more more of the insurance, so you can start prepaying things. And on a cash basis method, as long as you have the cash, then you would have more expenses that you can kind of pull into the current basis.
And obviously, that’s going to distort the reality of the performance, which the accrual process is trying to reserve not only for regulatory purposes, you might think, well, that’s you’re trying to beat regulations like taxes there.
But really for internal purposes, that’s what it was originally created for. Because you’re trying to create financial statements that are comparable from period to period. And allocating and being fair, like if I was to judge January versus February and be fair, so I can make projections into the future,
I would typically want to be using an accrual basis method so that I can make a fair judgment and then determine what my decisions should be made going forward.
So in any case, what do we do when we when we record the prepaid insurance, that means that under a normal accrual process, we’re going to say whenever you record something to insurance, whenever you pay the insurance bill,
you’re not going to record the other side insurance expense, but rather, you’re going to put it on the books as prepaid insurance and other current asset. Now if you set up this process with a bookkeeper and the adjusting department, and they’re in two separate areas, it still works quite well.
Because if you’re in a bookkeeper and your CPA firm, for example, is doing the adjusting department, the adjusting process, you will just continually record everything to prepaid insurance.
And at the end of the period, you’re going to ask them then to do the adjusting entry, which would be to look at the actual insurance statement, determine how much of the insurance have been passed,
and then expense the portion of the insurance that has passed, that’s a really that’s a fine system to use. However, if you’re not doing adjusting entries, or possibly, if you if you you, it’s possible to do it the other way to just write off everything to an expense account, just like you normally would here.
And then if you need an adjusting entry at the end of the period, to have the accounting department, remove it from the expense account and record the portion that has a prepaid insurance.
The reason that doesn’t work quite as well. Or the reason it’s a little bit easier to do this method reported it as a prepaid asset and then expensing it is because of course on the expense side of things, these expenses roll over to net income at the end of the period.
So they’re temporary accounts, whereas the balance sheet accounts are permanent accounts. So if you’re going to be using this kind of adjusting process, you want to talk to basically your accountant.
And so are we on a cash basis on an accrual basis? Would it be easier for me to record the prepaid insurance and any other prepaid, which have a similar process prepaid rent, for example, if something like that as an asset and then have you do the adjusting entry at the end of the period, or should I just expense it as we go because we’re on a cash basis?
Or if you don’t, if you don’t think if you don’t trust them to pick it up? You might want to record it as an expense and let them let them know that hey, that expense is on a cash basis or something like
Okay, so we’re going to put it here. Now we’re going to imagine that we’re going to imagine that this happened, basically, the policy is going to start in February. So we paid the $12,000.
And we’re going to imagine it’s going to be a year long policy that starts in February. So we actually got something in February here in rather than January. So so we didn’t actually get any coverage in January, we’re going to imagine the coverage started in the month of February,
and then it’s going to continue for a year. So that means that after February has ended for the timeframe of January and February, we would have 12,000 divided by divided by 12 months 1000, of course of the insurance that should be recorded this before the cutoff date before February.
So that means we’re going to record an expense of the 1000. And then we’re going to decrease the 12,000 by 1000, to 11,000, which of course represents the asset, the prepaid asset on the books that we haven’t yet received 11 months 11 times 1000 being 11,000, that should be remaining.
Okay, so that’s going to be a calculation, let’s go back to the first tab, we could do this with a journal entry, we could hit the journal entry, or that would be the traditional way of doing it. But there’s only two accounts affected. So for this one, we might just want to use the register and do that format, which will still be recording a journal entry,
we’ll see, we’ll still see the debits and credits. But let’s use the register to do it. So to do that, I’m going to go to the bookkeeping. At the bottom, if you were in the accounting view, by the way, it would be under the accounting.
And then we would go into the chart of accounts over here, it’s going to be under bookkeeping, and then we’re going to go to the chart of accounts. And then we’re going to close up the hamburger.
Now this is a classic adjusting entry, which means there’s going to be one balance sheet account and one income statement account that has to do with timing, and cash is not affected. So we’re going to I can’t use the income statement account of insurance expense, because it doesn’t have a register.
So I got to go to the asset account. I also want to see if I have an appropriate insurance account down here or if I need to add one. And if I need to add one, I’m going to change to the accounting view. So the business view doesn’t drive me crazy, don’t let the Business View drive you crazy if you’re if you’re adding account.
So here’s the here’s the insurance expense, and then it’s got all these categories below it, you don’t have to use the subcategories, I’m just going to put it into the parent account of insurance expense.
But of course, if you had if you wanted to sub categorize the types of insurance you have, you can sub categorize them out using their sub categories. Okay, so it looks like it has what we need.
Note that there’s no register for the income statement accounts, there are registers for the balance sheet account, we’re going to look for the asset account up top, it’s an other current assets of the prepaid insurance. There it is right there, there’s the 12,000. Let’s open the register. So remember, we’re in the register for prepaid insurance, and we want to decrease it.
So we’re going to hit the drop down to the type of form that we can use to do that, it’s going to be a journal entry, we want to record them as journal entries. Because we want all of our adjusting entries to be journal entries, we want all of them to be as of the cutoff date, which is oh, 220 802 28 to two. And then we’re going to say that this is going to be the memo,
I got to put a DJ entry at the least you might want to put more in it except for example, you might want to say how much of the policy had expired, you might want to say like it’s a year policy, starting Feb, and then one month past. So something like that for the calculation.
So you could see the calculation, and we’re gonna say it’s a decrease of $1,000 1000. The other side is going to go let’s see if it if it does this in the in the business view if it allows me to find it, insurance expense, insurance, claims, insurance claims.
insurance expense for crying out loud. There it is, I found it. If I just type that in insurance and it gives me an it’s an expense account. That’s what I want. Maybe I spelled it wrong. Here we go. I do that sometimes sometimes I misspell stuff. Not very often. pretty often.
That’s going to be let’s save it. Let’s save it. And so now we’re left with the 11,000. That’s what we would expect. That’s what I expected. At least that’s what we should have expected.
Let’s go back to the balance sheet. And so now let’s run this thing again. Ultrabase run, run it another time. Another time of running another lap. We’re making the balance sheet run laps. Here we go.
So now if I look at the prepaid insurance prepaid insurance, where are the 11,000, which is, of course, the 1000 times 11. Because there’s 11 months left at the 1000, that we have not yet received. If I go into that, and hold Ctrl and scroll down, there it is 228 as a journal entry, as all adjusting entries will be drilling down onto it, it doesn’t take us to the register, but to a journal entry type of form, I’m going to copy the description and put it on both sides here.
So we see it, whether we’re looking at expense or the tote, or the prepaid, save it and close it again, save it and close it, scroll it back up, scroll it back up back to the balance sheet,
let’s go to the income statement, the other side of the stuff that’s happening, run it, running it, and then we have can scroll back in we’ve got then insurance expense, there it is, there’s the 1000 that we have then recorded.
Now we don’t have anything in January, because we’re assuming that we didn’t start the insurance till February. So we were running crazy in January, and without the insurance expense.
So there it is. Now you might be saying do I have to reverse this one, like we did the reversals of the last couple transactions?
And the answer is no, because this is a permanent adjustment. This isn’t a timing thing. It’s not like they entered the insurance, you know later than it should have been and we had to fix it and then reverse it. Instead it’s a permanent difference that’s going to happen. So they’re always going to record whatever they pay into the prepaid insurance,
we’re going to look at the amount of the insurance that had expired and then decrease the prepayment record the expense for the port portion that had expired periodically, typically at the end of the month and or the end of the year, depending on the circumstances. Okay, let’s go to the trial balance and see where we stand now.
Where are we standing, these are the two legs. I call the left leg debit I call my right leg credit. We this business stands on those legs. And so this is where we have it strong legs here.
You can take a look if they if your numbers tie out to these great if not tried doing a date range change and we will then do the journal report at the end to diagnose the differences.