This presentation, we’re going to discuss the closing process for our accounting system. Get ready, because here we go with aplos. Here we are in our not for profit organization dashboard, let’s head on over to our Excel file to see what our objective will be, you’ll recall, we’re going to be in tab 10. By the way, we’re over here in tab 10. You’ll recall that we’ve been looking at each transaction with the accounts that will be affected, posting those over to our Excel worksheet to see the effect on the trial balance on the accounts. Now, we did this in terms of posting to our first trial balance up top and so row one. And then we said, okay, what if we break this information out, and I want to break this information out by not just the expenses by their nature, but by their function. Now, in aplos, we have a nice system to do that we’re going to use the phones and the classes, or the funds and the tax to do that here.
If you’re looking at a two dimensional kind of system, then well, how can we do that? Well, we could take the ending balances here, we can make them our beginning balances. And then we can enter that journal entry that would be taking this these expenses out of basically, expenses that are categorized by their nature, and put them into expenses categorized by fund. So that’s what this second trial balances, I won’t go to this in depth, we will add this practice problem if you want to see this problem done, just in Excel. Then we also said that we have this transfer of the assets that are released from restriction. So we had our journal entry releasing the acids from restriction. Now we want to think about the closing process. Now the closing process, what didn’t it’s the same kind of closing process, no matter what type of organization, there’s just some little tweaks to it, which will typically have to do with the structure of the organization.
So if you’re a sole proprietor is usually fairly straightforward, because you only have one equity account, therefore, you roll up your roll in the net income to the equity. In other words, all these blue accounts are basically the equity account. So the total equity here would be the 278 900. So on the balance sheet, then we would be reporting the 278 900. As you can see here, in the statement of activities, I’m going to start at the statement of net position, the balance sheet, and then down here statement of activities, you’d show just the income statement portion, they happen to be the same right now, because this is our first month of operation. And therefore we have no beginning balances in the net assets.
And then if you’re talking about a partnership, then you’d have to break these assets, these net assets into net assets by partner, which which makes things a lot more confusing, because then you’d have to have an allocation of basically the net income to the partners capital accounts. If it’s a corporation, then you got to break it out between the contributions by the owners for the stock purchases, and then breaking out things like the retained earnings, everything would roll into retained earnings in that case. Now if we’re talking about a not for profit organization, we have this issue with the restricted and not restricted assets. So that means that our income statement, if you think of the closing process, these items that we had to accounts for in this format, restricted and unrestricted, we’re gonna have to close the restricted items out into the restricted net asset account. And then we’re gonna have to close out the unrestricted items into the unrestricted net asset accounts.
The other way you can think about it is if you take a look at this statement of activities, this is in essence, the income statement, the bottom line in the restricted items here is going to roll into the net assets that are restricted. So that’s going to roll into the ones with donor restrictions. So the the one with 234 656, is this one. And the one without this is without donor restrictions, is then going to roll into the equity section into that equity section. Now, one of the key things that aplos has is a nice system of doing this, if you use some other type of software, if you convert like a QuickBooks or something, then typically you’re gonna have more problems, you have to you possibly have to do an adjusting entry to do that. The fund accounting and aplos makes that closing process easier. And that’s one of the huge advantages of using it. You know, that’s, you know, one thing you don’t have to deal with as as much if you have everything set up. So let’s just check that out.
So if I then open up our reports, we’re going to go to our reports and reporting tab. Let’s open up the balance sheet, we want to see the balance sheet by fund, then I’m going to right click on this tab up top and duplicate it. And then we’ll go back to the tab to the right to the left and open up the income statement. So we’ll hit the reports and then we’ll go down to the income statement income statement by fund. Okay, so these are the two statements. If I go back to the balance sheet, we’re going to change the date we’re looking at the end of January so we’ll say the end of January and so there We have that, I’m going to add the total column. So I’m going to hit the drop down here and say I like to see the total. So the total column and say, Okay, then I’m going to go to the income statement.
And I’m going to set the date. And let’s bring a custom date this time and just look at January. So I’m going to say I want to see January 1 through January 31. And so there we have it, and then we’ll say apply that. So there we have that, and then I’d like to see the total column. So I’ll hit the drop down here and see the total column. Now again, if you if this is kind of standard to see the total column, you could save that report to not have to pull it up each time. And I’ll show you that in a future presentation. So now if we if we look at the closing process, basically, in total, you’ve got the income accounts here, right, that the income account should close into the the balance sheet account. In other words, the balance that the net assets in the balance sheet need to be broken out, the income statement is kind of like a breakout of the timing, or what’s happening over a certain amount of time.
With you know, with that account, you know, we’re going to be breaking out the equity section. In other words, the balance sheet, if you think about it, over here, you got assets minus liabilities are the net assets. net assets is kind of what people kind of are concerned with, because that’s the net value, that people are going to try to spend net assets or equity here. And then you can get a story about this net assets by the income statement. That’s basically what the income statement is, we only have one year of a story. Therefore, this entire story will be told here by the income statement, because we only have one year, if we had multiple years, then we’d have beginning balances that we’ll have to look at. Now. If you go back to the prior tab, over here, it’s nice, they then give you the summary down below. This is basically the breakout of how equity or net assets is calculated.
So you’ve got the beginning balance, that would be you know, if we had income in the prior year, so if we had something in the prior year, we’d have a beginning balance in the equity section, then we have other fund balance movements. And then we have the net income. So this is the net income or loss. And then we have the ending balance, the ending balance here, equaling the net income, because it’s the first year of operations. So if it were not the first year of operations, the first month of operations, then we would have a beginning balance up top, plus the activity during that time period to give us the ending balance, this little summary on the income statement really is a nice thing to have, because then it allows you to pull this over to the equity section and not do anything too funny with that. And let me just give you an example of what I mean by something funny happening.
Most other accounting software’s like a QuickBooks Online QuickBooks desktop, on exit zero right now, zero software, most software’s and sage it are designed for for profit, if you go to the second tab on the assets section, will typically put a line item in here saying net income, which is what they’re trying to do is say, hey, look, the balance sheet is tied into the income statement, they’ll break out in other words, the portion of equity that is related to the current year net income, and they’re trying to tell you, hey, look, the balance sheet is related to the income statement. But it’s a problem. Because when they do that, there’s going to be a net income line on the balance sheet that we can’t then allocate easily between the restricted and unrestricted. So so that’s that’s kind of a quirky problem that happens with pretty much most other accounting packages that have that kind of system. What we want to see here for external reporting and internal reporting, is is this equity section with or net assets broken out by restricted or unrestricted, these two categories.
And again, we can’t really do that if they if the put in some other thing that says net income, which really shouldn’t be on the balance sheet. It’s trying to it’s trying to do something that could work for a certain purpose, but doesn’t help us with this breakout. So notice, that’s one thing that’s not here. And that’s and that’s great. So that’s so now we see the breakout, we have a nice breakout between the restricted and unrestricted. And if we go back to the income statement, they get the little summary down below, which kind of reminds us how the balance sheet relates to the income statement, how does the balance sheet relate to the income statement? Well, here’s those get into the the, the fund balance the ending fund balances, which are basically the net asset balances that will be on the balance sheet. So here’s going to be the net income, here’s going to be the fund balance calculations below it.
Now also note that when we talk about when we use like a class feature, which is what’s usually used another like like a QuickBooks desktop, QuickBooks Online or quick or you know, an x zero or for talking sage, when you use a class feature, then it’s still all the whole income. This net income still typically rolls in the default setting is that net income rolls into one equity account like a retained earnings account, or just an equity account, a capital account, and then we would have to do with that. adjusting entries. So know the SOP notice, in other words, the software’s gonna do the rollover process no matter what software you use, but many software will just roll over the entire income net income into some one equity account. And we’ll also have that that net income account kind of bothering you in there.
And you’ll have to do an adjusting entry oftentimes, or make some kind of adjustment to break out between the proper allocation between restricted and unrestricted, big benefit of using the fund feature we have where we have the restricted and unrestricted categories here on the balance sheet, you have you have a I mean, if you don’t need those restrictions on the balance sheet, we noticed we had an added little thing that could be a little bit more difficult, which is, which is this allocation. But the really nice thing about using that type of format is that the net income will already roll into the proper equity account, we don’t have to make any adjusting entry. So the software, most software will do the closing process to close into some equity account. In this software, it actually using the funds, it’ll close into the correct equity account, we have two equity accounts, and it’ll close into the correct equity account.
So in other words, you can think about this in two different ways, right, you got you can think of it almost as two different kind of companies in a way, we got the restricted and unrestricted, we’ve got the net income for the restricted and unrestricted, these two items rolling into their respective equity accounts, which will then show up in the equity section on the balance sheet. And you can also think of it of course, as the assets minus the liabilities in each of these equity sections, lining up to the net assets on the on the balance sheet.
So when you use a fund, when you use these fund categories, when these fund items instead of the categories in the software, then then you’re going to have that breakout and you can kind of think of them, you can have to think of them as which is can it have some pros and cons, you can think of them as completely different, you know, almost two different accounting systems, where as the class feature, you know, works a little bit differently in the class feature, we’ll hear a tag feature, they use the tag feature here, which is similar to the kind like the class feature that is used another other kind of accounting software, which isn’t going to break out the information on the balance sheet, but will give you that allowance to break that information out on the activity statements, such as the income statement.
So bottom line aplos, using these fund accounting allows you to do the to do the closing process pretty much without any added needed adjustments, which is great. Other software, if you’re trying to adopt other normal software will typically still have the closing process, but will have some kinks to it in that you’ll have to do some journal entry. And then you’ll also probably be ending up with this net income line in your balance sheet. Which means that you’re probably going to have to export it to excel and do some formatting in excel in order to remove the fact that that that that line item is there. So here, you don’t have to do any of this that this reports pretty much good to go.
The only thing I don’t really like it, I mean, I would think that this line item should be should be called net assets. But it’s not probably not going to hurt anything that’s pretty minor in comparison to other software and whatnot. And again, if that does bother you, then you can export this to excel and just change that to net assets as one little, little tweak. Other than that, the reports are pretty good to go for kind of, you know, external reporting just right out of the out of the software, this is one thing that you can’t really change the and it’s again, the same with other type of software as well, this these sections are basically part of kind of like the code or part of the the non permanent part of the software. So you can’t really change that.
But if you export it to excel, you can make those changes. But again, minimal changes necessary here, given the fact that the software’s for not for profits, as compared to other software. And obviously we’ve talked before just about the the ability to have this report. And this report, for example, just showing the restricted and unrestricted and then have the supporting reports that are by tags. That is really useful. And again, our reports that we can basically use to show and display just right out of the software without needing much adjustment outside of it in something like an Excel. So that’s going to be it for now. Let’s get out of here.