QuickBooks Pro Plus desktop 2022 adjusting entry prepaid insurance Get ready because we bookkeeping pros are moving up the hilltop with QuickBooks Pro Plus desktop 2022. Here we are in our get great guitars practice file, go through the setup process with a view drop down the open windows list on the left hand side company dropped down home page in the middle maximizing to the gray area reports drop down company and financial going on down to the balance sheet standard customizing that report with a range change from oh one to 2202 28 to fonts and numbers bringing it on up to our 14.
00:40
Okay. Yes, please. And okay. Reports drop down again company and financial profit and loss standard range change a 1012 to 202 28 to two customizing that report with the fonts and the numbers change in that font on up to 14. Okay. Yes, please. And Okay, one more time reports drop down, we’re looking at the account and taxes, Trial Balance trustee TV with the range change a 101 to 202 20 822. Customizing that report fonts and numbers change in that size? On up to 14. Okay, yes, please.
01:23
And okay, we’re now looking at the prepaid insurance, which is the classic type of adjusting entry often needed. It’s a similar process as the depreciable assets. Let’s go through the concept of it. And then we’ll go into the adjusting entry. So let’s first look at the depreciable assets just to think about the concept there because it’s more extreme. So for example, even if you’re on a cash basis system, you paid a lot of cash for, say, an office building like you got bought a full Office Building for cash, you still wouldn’t be expensing it even if on a cash basis, but putting it on the books as an asset.
01:59
For one reason it being so extreme, it’s such a big difference between when you’re actually going to consume the use of the building to when you paid for it that you kind of have to go to an accrual basis. And to because the tax code is going to force you to go on an accrual basis with that as well. So you’re going to be forced to deviate. And that also forces you then to do an adjusting entry type of process. When you’re talking about depreciable assets, you’re going to be allocating the cost of those big purchases you made over the useful life as you consume them.
02:31
And the form of depreciation, the in the prepaid insurance is a lesser kind of extreme example, where, for example, you might purchase a full year’s worth of insurance at one point in time, which is quite common, given the fact that you might get a better rate to do so if you do that. Then if you expense it all at the same point in time, you can have a distortion of the comparison from one month to the other, because you’re going to have this big expense related to insurance expense.
03:03
So we have the same kind of justification as we do with the depreciable assets to put it on the books as an asset, when we purchase it. And then when we consume it, we then allocate it over the useful life as we consume the insurance. So it’s a similar type of concept. Now, if you pay for insurance each month, you might say, well, it’s close enough. And so I’m just going to be on a cash basis there. Because this accrual process does take some time for it to do it takes more time to put it on the books as an asset, and then do the adjusting entry process.
03:37
So note if I go over, for example, to the profit and loss, and let’s take a look at this P and L on a monthly basis and do the side by side comparison by changing the totals to the month. So now you can see this side by side comparison. And again, if I put this prepaid insurance in there, as of January, you would have a large expense of $12,000 down here of the insurance, which would take this to a negative, which would skew the comparison when I can compare what happened in January to what happened in February. So that’s why then we would say okay, I’m going to put it on the books as an asset and an allocated over the useful life as we consume the insurance.
04:19
So that’s what we’ll do now now that the general idea of this that separation between the accounting department and the the adjusting department, the two you want to put on two hats when you’re thinking about these two things, is you’re going to say when I do the data input going over to the home page when I enter either the checks or when I enter the bills related to the insurance. I’m going to memorize the transaction not go into insurance expense, but rather go into prepaid insurance.
04:47
So it’s an automatic process. I could save it. If I’m doing a process which I’m doing this through the bank feeds for example, and every time I pay the insurance company I can save the same transactions just like I normally would but instead of To the expense account, it’s always going to go to the prepaid account. And then periodically i or whoever’s doing the adjusting process will go in and reduce the prepaid account for the amount that had been consumed, and record it then to the expense that had been consumed.
05:17
Now, the other way you could do this, you could do this and just say, I’m just going to record it to insurance expense as the bills are paid. And if there needs to be an adjustment, then the the accountant at the end of the year, for example, can adjust it the other way, reducing the expense for the amount that it’s still in prepayment. You might say, Well, why don’t I just do it that way you could, but it’s a little bit more difficult, because the the income statement closes out, close us out to the balance sheet as we saw. So the income statements are the temporary accounts.
05:52
So if you’re going to plan on an adjusting entry process related to some kind of prepayment, like prepaid insurance, it’s easier to put all the information generally as you consume or pay the cash into the asset account. And then you make the adjusting entry, reducing the asset and recording the expense, it’s possible to consider it you can see how it could be possible doing it the other way, expensing it, when you pay for it, and then taking it out of the expense and put it into the asset periodically. But again, it’s a little bit more complex. That’s not how it would generally be set up.
06:29
So we set it up in the classical kind of way, we made all the payments, and we put the payments into the balance sheet accounts, which would be an other current asset, we now have on the balance sheet now 12,000 In the prepaid insurance, now this payment happened at the end of January, let’s assume that the insurance period started in February, so when it’s going to go from February, till 12 months later to the following February. So it doesn’t it’s not a calendar year policy, which is often the case. So we’re going to allocate and that causes another kind of issue with the timing issues with regards to the income statement if you were to record it as an expense.
07:07
So what we’re going to do is say, Okay, well 12,000 12,000 divided by the months, which are 12, we’re going to cover we’re going to do this adjusting entries on a monthly basis means that we had 1000, that has been consumed for the month of February, we didn’t have the policy in January. So that means that we had consumed of this 12,000 as of this point in time 1000 of it, what I would like to do is reduce the prepaid insurance now, because there’s 11 months remaining, which is 1000 times 11 11,000.
07:39
The other side should be the expense of the 1000, which has now been consumed. So we’ll do that with an adjusting entry. Now this is a nice simple adjusting entry, meaning only two accounts are impacted classic adjusting entry because there’s a balance sheet account and an income statement account, which is the normal process for an adjusting entry. And we have a balance sheet account, which is no, there’s no sub ledger or anything problems with it. So we’re going to use the register to enter this.
08:05
And we’ll also look at it in journal entry form. So I’m going to go to the list strapped down, we’re going to go to the chart of accounts. And we’re looking at the prepaid insurance here, that’s the one that’s on the balance sheet side of things, we can’t go to the other side, we can’t go then to the insurance expense account. Because it’s an expense, it won’t have a ledger because it’s a temporary account.
08:25
So I’m going to go up to the prepaid insurance, double click on it. Going into it, I’m going to close the carrots, we could see a little bit more detail here. So there it is. And we’re just going to say then, that there’s a decrease of $1,000. And the other side is going to go to insurance expense, making sure I don’t get the internet expense insurance expense.
08:45
And this is going to be a DJ adjusting entry. One month consumed or something like that, for the adjusting entry, I’m going to say Enter, and then it brings it down to the 11,000 which is what we would expect. Let’s check it out on the financials, closing this out, closing this out opening up the carrot.
09:07
And then we have the 11,000 in the prepaid insurance double clicking on it. There’s the 12,000 minus the 1000 to the 11. It’s a journal entry type transaction, double clicking on it to check it out takes us back to the register, double clicking on this item to get to the journal entry. There’s the journal entry and debit and credit format. The prepaid going down with a credit and then the expense going up with a debit. I’m going to put this memo on both sides here so it’ll be in both sides of the transaction and then record that.
09:42
Close that back out again closing this back out again closing this back out again. And we’re then going to go to the PnL profit and loss and now we see that we have the insurance expense should be in here somewhere There it is. insurance expense for the prepaid Insurance has now been applied out and we didn’t have the policy in January we’re assuming for this practice problem. So then if I go to the trial balance of course we could see these two sides on the one trial balance.
10:11
Here’s the prepaid insurance other side down here on the expense side of things with the insurance expense. So you could check your numbers now if you if you would like and make sure everything is lining up the way it should be. And, and then we’ll move on to the next item. Next time we will be making the backup files. Hopefully those will be useful if you’d like to jump around in the practice problem as well.