quick books
CHAPTER NOTES- CHAPTER 5
Period-End Procedures
QuickBooks allows you to record journal entries in general journal format.
When recording transactions with vendors and customers in the various windows, QuickBooks simultaneously records these transactions in general journal format behind the scene.
The accounts used to record transactions are found in the Chart of Accounts (Lists/Center).
Usually account balances change because of transactions with other businesses or individuals. Some changes are not caused by transactions with other businesses or individuals. They occur from the internal operations of the business such as using office supplies and prepaid insurance, etc.
Account balance changes that occur from daily operations are recorded at the period end as general journal adjustments (Period End Adjustments) so that expenses and revenue are accurate for that accounting period and the financial statements are accurate. The period we are adjusting is one month.
Four Levels of Operations in QuickBooks:
1. Company Setup
Our Company File has been setup.
2. List
You will be updating the Chart of Accounts (Lists/Center) so that the accounts are ready for the period-end adjustments.
3. Activities
Print the Trial Balance Report – important to do this before any changes – the amounts will be needed to help calculate the adjustment amounts.
Use the Journal Entry Window to enter each adjustment. An expense account will be increased with a debit for each of the adjustments amount. Below are the types of adjustments that may be needed:
TYPES of ADJUSTMENTS:
Prepaid Expenses are items that are acquired and paid for in advance of their use.
Common Prepaid Expenses are:
Prepaid Rent
Prepaid Advertising
Prepaid Insurance
As prepaid expenses are used, an adjustment is made to reduce the asset accounts and to increase the related expense accounts.
Example: On February 29, record one month of insurance expense. Expenses are not recorded at the time of pre-payment. The insurance was purchased for $2400 in February and recorded in the Chart of Accounts as an asset called Prepaid Insurance. It is a one year policy with the year beginning February 1.
Prepaid Insurance is an asset, because you have paid for 12 months of insurance. An asset is something of value that belongs to the company. As it is used up one month at a time, the asset account will be reduced and the expense account increased.
First calculate the amount: 12 months of insurance costs $2,400, so each month will be $200
At the Journal Entry Window enter:
Debit $ 200 – Insurance Expense
Credit $200 – Prepaid Insurance
Used Supplies – the adjustment is made to record the expense of the supplies used for the accounting period and to record the expense of those supplies for the period.
Example: On February 29, the Office Supplies on hand totaled $ 250. The trial balance before starting your adjustments shows a balance of $400 in the Office Supplies Account. Calculated $400 – 250 = $150 ($150 in office supplies was used for the period)
Reduce the Office Supplies Asset Account – Increase the Office Supplies Expense Account
Debit $150 – Office Supplies Expense Account
Credit $150 – Office Supplies Account
Accrued Expenses – expenses that relate to (are used in) the current period but have not yet been paid or recorded.
Examples of Accrued Expenses:
Payroll taxes & salaries for part-time workers depending on work dates (taxes are not legally owed until the salaries are paid)
Interest on notes payable (Only the Note or Loan amount is recorded. Interest has not been recorded.)
Example: On February 29, record one month of interest expense $50 on the note payable.
Interest is not due until the note is due. An adjustment is made to record the interest expense to the period.
Increase the Interest Expense
Increase an amount that will be payable in the future Interest Payable
Debit $ 50 – Interest Expense
Credit $50 – Interest Payable
Adjustments for Depreciation:
A long-term asset (Fixed Asset) is an asset that is kept for more than one year.
The cost of long-term assets such as equipment, furniture, and automobiles is not recorded as an expense when purchased. Instead the cost is recorded as an asset and spread over the time the assets are used for the business. This cost is called depreciation.
Generally Accepted Accounting Principles require that the original cost of a long-term asset continue to appear in the asset account until the business has used up or disposed of the asset. We cannot reduce the long-term asset account.
We will need to create a contra account. A contra account is an account in which the normal balance is opposite of a related account.
The contra account we create will relate to the long-term asset. The normal balance for an asset is a debit so the contra account will have a credit account. The contra account will be named as a depreciation account for the long-term asset.
Example: On February 29, record the depreciation expense on the Computer which is $60 per month.
Increase the Depreciation Expense Account
Increase the Contra Account called Accumulated Depreciation
Debit $60 – Depreciation Expense
Credit $60 – Accumulation Depreciation (This is the contra account and is a subaccount for the Truck account. When you look at the Balance Sheet after completing the chapter, you will notice that the original Truck Cost has not been change.)
4. Reports
As transactions are recorded in the activities windows, QuickBooks will simultaneously update the account balances in the Chart of Accounts (Lists/Centers) from the transactions.
This information may be used in reports from the Chart of Accounts (Lists/Center) and financial statements.
Refer to Procedure Review on pages 155 through 157 for step-by-step directions for updating the Chart of Accounts, Recording the Period End Adjustments, and Creating Reports.