1. Adjustments and Year-End Procedures
Chapter 9

2. Objectives Process 1099 forms for vendors Print 1099s and 1096 forms
Edit, void, and delete transactions
Enter general journal entries
Track fixed assets
Memorize and schedule transactions to be automatically entered
Close the year and enter special transactions for sole proprietorships and partnerships
Set the closing date to lock the company file 1

3. Processing Form 1099
At the end of each year, you must prepare and send an IRS Form 1099 to each of your eligible vendors and to the IRS
1099 forms must be sent to your vendors by the last day of January following the applicable year
If the vendor is a corporation or if total annual payments to the vendor are less than $600, you are not required to prepare Form 1099-MISC
When set up properly, QuickBooks automatically tracks the details of your payments to 1099 vendors
Demo Preferences feature.
QuickBooks has many customizable options that allow you to configure the program to meet your own needs. Many of the preferences affect how QuickBooks operates.
Note: If you do not subscribe to a payroll service, you will not receive updates to the form layouts in QuickBooks. Updates may be required to print data correctly on forms in the years following the QuickBooks publish date. If this happens, you will need to subscribe to a payroll service to get the form updates. 1

4. The 1099 Wizard
The 1099 and 1096 Wizard will allow users to go through four steps to process the 1099 and 1096 forms.
Review and edit 1099 Vendors
Setup account mapping preferences for 1099s
Run a summary report to review 1099 data
Print 1099 and 1096 forms 2

5. Editing Vendors for 1099 Setup
Fill out the name and address fields so that the 1099 will print all the information correctly on the form
Record the taxpayer ID for each 1099 vendor in addition to selecting that the vendor is eligible for 1099
Demo Editing Vendors for 1099 Setup.
Edit each of your 1099 vendors and verify that you have the full name, address, and identification number (e.g., social security number or federal employer identification number) for that vendor.
Make sure to record the taxpayer ID for each 1099 vendor in addition to selecting that the vendor is eligible for This tells QuickBooks to track 1099 expenses for the vendor.
It’s best to collect this data when you first start making payments to the vendor. Your vendors are required by law to provide you with this information. Provide your vendors with a W-9 Form to complete before they begin services so that you have their official information on file.
You can download the .pdf version of this form by going to Select Fill-in Forms and then search the list of available forms for Form W-9.
Now that you’ve set your 1099 preferences and edited each of your 1099 Vendor records, QuickBooks automatically handles all of the tracking. Whenever payments to a 1099 vendor exceed the threshold set in the 1099 preferences ($600, in this example), QuickBooks will create a 1099 for that vendor at the end of the year.
Make sure to fill out the name fields so that the 1099 will print the information correctly on the form. 3

6. Setting Up 1099 Preferences
Select the Edit menu and then select Preferences
Scroll down and click Tax:1099
Click the Company Preferences tab
Drop down Account listing to choose the Rent expense to link to Box 1.
Demo Setting Up 1099 Preferences
Edit -> Preferences -> Tax:1099. Select the Company Preferences tab.
Since not all payments to vendors are subject to 1099 reporting, you can include selected accounts from the chart of accounts.
If the total payments to a 1099 vendor exceed the thresholds in Box 7: Nonemployee Compensation , a 1099 will print for that vendor.
Note: When you use Items to track your purchases, the Item setup determines which QuickBooks account is used. Therefore, if you use Items to track payments to 1099 vendors, make sure you select the accounts to which those Items point in your 1099 preferences. 5

7. 1099 Summary Report
When you use the Pay Bills function, QuickBooks dates the printed check as of the bill payment date regardless of when the check is recorded. The date of the check determines the 1099 period in which the payment will be included. 8

8. Printing 1099s and 1096 Forms
Select Print 1099s button from the 1099 and 1096 Wizard
Demo Printing 1099 and 1096 Forms
Be sure to specify date range. Note: Make sure you have valid taxpayer ID’s and addresses for your 1099 vendors before attempting to print. If information is incorrect or missing, the IRS may reject your 1099s.
Preview 1099 before printing.
The 1096 Form is a “transmittal” form that accompanies your Form 1099s when you send them to the Internal Revenue Service. 9

9. Editing, Voiding, and Deleting Transactions
Unlike many other accounting programs, QuickBooks allows you to change any transaction at any time
Editing Transactions:
To edit (or modify) a transaction in QuickBooks, change the data directly on the form
Voiding and Deleting Transactions:
Voiding and deleting transactions both have the same effect on the General Ledger — zero out the debits and the credits specified by the transaction
Voiding a transaction keeps a record of the date, number, and detail of the transaction; deleting a transaction removes it completely from your file
Demo Editing Transactions. Demo Voiding and Deleting Transactions.
Key Term: A Closed Accounting Period is a period for which you’ve already issued financial statements and/or filed tax returns.
When you change or delete a transaction, QuickBooks immediately updates the General Ledger with your change, regardless of the date of the transaction. Therefore, if you make changes to transactions in a closed accounting period, your QuickBooks financial statements will change for that period, causing discrepancies between your QuickBooks reports and your tax return. You should almost never change transactions dated in closed accounting periods, or transactions that have been reconciled with a bank statement.
Some companies close their books monthly, but other companies only close the books quarterly or annually. Make sure you know how often your company closes periods before you make changes to transactions that might affect closed periods.
Note: A period can be closed even if there is not a tax return for the period. For example, you can close the books through January 31, 2005, even though your last tax return was dated December 31, If management makes decisions based on printed financial information dated January 31, 2005, any changes to QuickBooks information dated before January 31, 2005 will cause the reports in QuickBooks to disagree with the printed reports. Also, many companies submit financial information to third parties (e.g., banks) during their tax year on a monthly or quarterly basis.
Tip: You can “lock” your data file to prevent users from making changes on or before a specified date. In QuickBooks, this date is referred to as the Closing Date. At the very least, you should lock the file at the end of each fiscal and/or calendar year. You may also choose to lock the file monthly, after you perform bank reconciliations and adjusting entries for the month. 10

10. Recording Adjustments and General Journal Entries
Adjusting entries are transactions that adjust the balance of one or more accounts
A few examples of adjusting entries in QuickBooks:
Recategorize a transaction from one class to another
Recategorize a transaction from one account to another
Allocate prepaid expenses to each month throughout the year
Record non-cash expenses, such as depreciation
Close the Owner’s Drawing account into the Owner’s Equity account
Good accounting practice suggests that you keep a separate record of each General Journal Entry you make in QuickBooks. This record will be very helpful if you’re ever audited or if you have to research the reasons for your adjustments. 14

11. Creating A General Journal Entry
Depending on your QuickBooks user settings, you may need permission from the file Administrator to create General Journal Entries
Select the Banking menu and then select Make Journal Entry
Demo Creating A General Journal Entry.
In these examples, we use a bank account called Journal Entries on the top line of each Journal Entry. If you create the Journal Entries bank account and then enter it on the top line of each General Journal Entry, QuickBooks tracks all the General Journal Entries in a separate register on the Chart of Accounts. This register allows you to quickly look up and view all your General Journal Entries. Though you use this account in every General Journal Entry, you will never debit or credit the account and therefore it will never have a balance. 14

12. Creating A General Journal Entry
Expert Tip:
Set up a bank account called Journal Entries
Use this account (Journal Entries) on the top line of each General Journal Entry
QuickBooks tracks all the General Journal Entries in a separate register on the Chart of Accounts which allows you to quickly look up and view all your General Journal Entries
Though you use this account in every General Journal Entry, you will never debit or credit the account and therefore it will never have a balance
Expert Tip: Set up a bank account called Journal Entries in your Chart of Accounts. When you use an account called Journal Entries on the top line of each General Journal Entry, QuickBooks tracks all the General Journal Entries in a separate register on the Chart of Accounts. This separate register allows you to quickly look up and view all your General Journal Entries. Though you use this account in every General Journal Entry, you will never debit or credit the account and therefore it will never have a balance.
Note: General Journal Entries must balance. The total of the Debit column must match the total of the Credit column. 14

13. Adjusting Expense Accounts Associated with Items
If you use Items to track the details of your expenses, you may need to enter adjustments to the Items as well as the Accounts to which the Items are assigned.
However, the Journal Entry window in QuickBooks has no provision for entering Items as part of the Journal Entry.
To solve the problem, use a “Zero-Dollar Check” in that it will have an equal amount of debits and credits in the splits area of the transaction.
Demo creating a Zero-Dollar Check 16

14. Tracking Fixed Assets
To track your asset values, create a separate fixed asset account for each grouping of assets you want to track on the Balance Sheet.
For example, you could set up accounts called Furniture and Fixtures, Buildings, or Vehicles.
Demo Tracking Fixed Assets.
When you purchase office equipment, buildings, computers, vehicles, or other assets that have useful lives of more than one year, you’ll want to add them to your Balance Sheet and record the depreciation of the assets periodically. Conduct a physical inventory of fixed assets annually to assure proper tracking and reporting. Your accountant may currently maintain this list for your company. QuickBooks can track the original cost for each Fixed Asset and the related depreciation for each asset of the company.
To track your asset values, create three accounts in the Chart of Accounts: A control (or master) account and two subaccounts.
The control account must be a Fixed Asset type of account as defined in the Chart of Accounts (i.e., Furniture and Fixtures, Buildings, Machinery, etc). Each control account will have two subaccounts: a Cost account and an Accumulated Depreciation account. When you purchase a Fixed Asset, code the purchase to the Cost account. This increases (debits) the Cost account and decreases (credits) the Checking account (assuming you used a check).
When you record depreciation, you increase (debit) the Depreciation Expense account and increase (credit) the Accumulated Depreciation account. The Accumulated Depreciation account is known as a “Contra” account because it normally carries a credit balance (i.e., a negative balance).
To see your Net Book Value on the Balance Sheet, select the Reports menu, then select Company & Financial, and then select Balance Sheet Standard. Enter 01/31/2005 in the As of field. You will now be able to view the Cost, Accumulated Depreciation, and book value of the Company’s Fixed Assets.
Alphabetically, the subaccount Accumulated Depreciation precedes the subaccount Cost. Therefore, QuickBooks automatically places Accumulated Depreciation above Cost when you create the accounts. However, the preferred format for financial statements lists Accumulated Depreciation (the contra account) below Cost (the asset account). To reorder the accounts to match the preferred format, open the Chart of Accounts list. Then, click the diamond next to the Accumulated Depreciation subaccount and drag it below the Cost subaccount. 17

15. Calculating and Recording Depreciation
Select the Company menu, select Planning & Budgeting, select Decision Tools, and then select Depreciate Your Assets
Select the Banking menu and then select Make General Journal Entries
Demo Calculating and Recording Depreciation.
When using the Fixed Asset Manager: Company -> Planning & Budgeting -> Decision Tools -> Depreciate Your Assets.
To record General Journal entry: Banking -> Make General Journal Entries.
If you want QuickBooks to automatically enter the depreciation journal entry each month, you can memorize the transaction and then schedule it to automatically enter. 21

16. Memorizing Journal Entries
Before saving the General Journal Entry:
Select the Edit menu
Select Memorize General Journal (or press CTRL+M)
Enter a name in the Name field so that you’ll recognize and easily find this transaction in the Memorized Transaction list
Set the fields in Memorize Transaction window to indicate when and how often you want the transaction entered and then click OK
Demo Memorizing Journal Entries.
Did You Know? You can memorize most transactions in QuickBooks. Just display the transaction, then select the Edit menu and then select Memorize [Transaction Name] or press CTRL+M or right click on the transaction, then choose Memorize [Transaction Name].
Now, every time you launch QuickBooks, it checks your Memorized Transaction list for transactions that need to be entered automatically. If the system date is on or after the date in the Next Date field (minus the number in the Days In Advance To Enter field), QuickBooks will ask you if you want to enter the memorized transaction. 22

17. Deleting, Rescheduling and Editing Memorized Transactions
Select the Lists menu and then select Memorized Transaction List, or press CTRL+T
Select the 2004 Truck Depreciation transaction in the Memorized Transaction list Then select the Edit menu and select Edit Memorized Transaction, or press CTRL+E:
This allows you to reschedule or rename the transaction, but it does not allow you to edit the actual transaction
Demo Rescheduling or Renaming Memorized Transactions. 23

18. Editing Memorized Transactions
To edit the 2004 Truck Depreciation memorized transaction, double-click it in the Memorized Transaction List:
This displays a new transaction with the contents of the memorized transaction. You can change anything on the transaction and then rememorize it
Demo Editing Memorized Transactions 24

19. Deleting Memorized Transactions
Select the Lists menu and then select Memorized Transaction List, or press CTRL+T
Select the Memorized Transaction in the list that you want to delete
Select the Edit menu and then select Delete Memorized Transaction, or press CTRL+D
Demo deleting a memorized transaction. 25

20. Closing the Year
Closing entry is an adjusting entry made at the end of each year, to transfer net income or loss into the Retained Earnings (or Owner’s Equity) account
In QuickBooks you do not need to make this entry, when you create a Balance Sheet, QuickBooks automatically calculates the balance in Retained Earnings by adding together the total net income for all prior years
At the end of your company’s fiscal year, QuickBooks automatically transfers the net income into Retained Earnings for you
Note: Sole Proprietorships should rename the Retained Earnings account to “Owner’s Equity.”
There are two advantages to QuickBooks automatically closing the year for you. First, you don’t have to create the year-end entry, which can be time-consuming. Second, the details of your income and expenses are not erased each year, as some programs require. 26

21. Closing the Accounting Period
Run reports for the year and verify their accuracy
Enter adjusting entries as necessary and rerun the reports
Print and file the following reports as of your closing date: General Ledger, Balance Sheet Standard, Statement of Cash Flows, Trial Balance, Inventory Valuation Summary, and Profit & Loss Standard for the year
Back up your data file
Set the closing date to the last day of the period you are closing
At the end of the year (or period), consider doing some or all of the following:
Enter depreciation entries.
Reconcile cash and loan accounts with the year-end statements.
If your business has inventory, perform a physical inventory on the last day of the year. Following the inventory count, enter an Inventory Adjustment transaction in QuickBooks if necessary.
If you are on an accrual basis of accounting, prepare General Journal Entries to accrue liabilities and revenue.
If your business is a partnership, enter a General Journal Entry to distribute net income for the year to each of the partner’s capital accounts. If your business is a sole proprietorship, enter a General Journal Entry closing Owner’s Drawing and Owner’s Investments into Owner’s Equity. See the section below for more information.
Run reports for the year and verify their accuracy. Enter adjusting entries as necessary and rerun the reports.
Print and file the following reports as of your closing date: General Ledger, Balance Sheet Standard, Statement of Cash Flows, Trial Balance, Inventory Valuation Summary, and Profit & Loss Standard for the year.
Back up your data file on a special backup diskette, zip disk, or CD ROM that will never be touched.
Set the closing date to the last day of the period you are closing.
Consider condensing the data file. 26

22. Closing Sole Proprietorship Drawing Accounts
For Sole Proprietorships, the Retained Earnings account should be renamed to Owner’s Equity so that the net income (or loss) will automatically transfer into this account
At the end of each year, create a General Journal Entry to zero out the Owner’s Drawing account and close it into Owner’s Equity
It is best to let the balance in the Owner’s Investments account continue to accumulate over time, so that, the Balance Sheet will always show the total investments made by the owner
Demo closing sole proprietorship drawing accounts.
For sole proprietorships rename the Retained Earnings account to Owner’s Equity so that the net income (or loss) will automatically transfer into this account.
Throughout the year, as owners put money into and take money out of the business, you’ll add transactions that increase and decrease the appropriate equity accounts. In a sole proprietorship, you’ll use the Owner’s Investments and Owner’s Drawing accounts. In a partnership, you’ll use the Drawing and Investment accounts for each partner.
To record owners’ investments in the company, enter a deposit transaction in your Checking account (or the account to which you make deposits), and enter Owner’s Investments in the From Account field.
To record owner’s withdrawals from the company, enter a check transaction in the Checking account (or the account from which the owner draws money), and enter Owner’s Drawing in the Account field.
At the end of each year, you’ll create a General Journal Entry to zero out the Owner’s Drawing account and close it into Owner’s Equity. You could also close out the Owner’s Investment account, but it might be best to let the balance in the Owner’s Investments account continue to accumulate over time. That way, the Balance Sheet will always show the total investments made by the owner.
To find the amounts for this General Journal Entry, create a Trial Balance report for the end of the year. Use the balance in the Owner’s Drawing account for a General Journal Entry to close the account. For example, if your Trial Balance shows a debit balance of $ in Owner’s Drawing, enter $ in the credit column on the Owner’s Drawing line of this General Journal Entry. Then enter a debit to the Owner’s Equity account to make the entry balance. 27

23. Closing Partnership Drawing Accounts
Use a General Journal Entry to close the Partner’s Drawing accounts into each Partner’s Profits account
To find the amounts for the General Journal Entry, use the year-end Trial Balance
Demo closing partnership drawing accounts.
To close the Partner’s Drawing accounts into each Partner’s Profits account, use a General Journal Entry like the one for Sole partnership. Use the same process explained before to get the numbers from the year-end Trial Balance. 29

24. Distributing Net Income to Partners
With partnerships, you need to use a General Journal Entry to distribute the profits of the company into each of the partner’s profit accounts
After making all adjusting entries, create a Profit & Loss report for the year and use the Net Income figure at the bottom of the Profit & Loss report to create the General Journal Entry
Demo distributing net income to partners.
With partnerships, you need to use a General Journal Entry to distribute the profits of the company into each of the partner’s profit accounts. After making all adjusting entries, create a Profit & Loss report for the year. Use the Net Income figure at the bottom of the Profit & Loss report to create the General Journal Entry.
Note that the General Journal Entry in Figure 12‑34 debits Retained Earnings. That’s because QuickBooks automatically closes net income into Retained Earnings each year. So this is the entry you’ll make each year to distribute the net income to the partners.
Also, note that the General Journal Entry is dated January 1. That’s because there is no “after-closing” Balance Sheet in QuickBooks. We want the December 31 Balance Sheet to show “undistributed” net income for the year, but if this General Journal Entry were made on December 31, you would never be able to see a proper December 31 Balance Sheet. Therefore, to preserve the 12/31 before-closing Balance Sheet, use January 1 for this closing entry. If you want to see an after-closing Balance Sheet, use January 1 for that Balance Sheet. Then, to preserve the after-closing Balance Sheet, it would be best to change the date on all normal business transactions that occur on January 1 to January 2. Use January 1 exclusively for these “closing” entries. 29

25. Setting the Closing Date to “Lock” Transactions
QuickBooks allows the Administrator to set a closing date that effectively locks the file so that no one can make changes to the file on or after a specified date
For further protection, all users, including the Administrator, can be required to enter a password before they can add, change or delete transactions dated on or before the closing date
To set the closing date:
Select Edit menu and then select Preferences
Select Accounting Company Preferences to enter the Closing date/ Password
Demo setting the closing date.
Note: Several privileges are reserved for the Administrator of the file. For example, the Administrator is the only one who can view or change the company information (name, address, etc) for the file. Also, the Administrator is the only one who can make any changes to the Company Preferences tabs in the preference section. For more information about the file administrator, see the QuickBooks onscreen Help.
The date you enter specifies that all transactions dated on or before that date are “locked.” Depending on each user’s access privileges, QuickBooks either prohibits additions, changes, or deletions to any transactions with a date on or before this date or warns the users before they make additions, changes, or deletions. To further protect transactions in closed periods you can also require all users, including the Administrator, to enter a password before they can add, change or delete transactions dated on or before the closing date.
Tip: The user’s setup affects the ability to add, change, or delete closed (“locked”) transactions. When setting up new users, always choose the setting that prevents them from making additions, changes, or deletions to transactions recorded on or before the closing date. Unless the Closing Date Password is set, the Administrator of the file can always bypass the closing date by simply ignoring a warning window. To better protect the closing date in your QuickBooks file, require all users, including the Administrator, to enter a Closing Date Password.
Note: Your accountant will probably recommend that you set the Closing Date at the end of each year (if not monthly), to prevent users from accidentally changing transactions after your company has filed its tax return. 30

26. Chapter Review Process 1099 forms for vendors
Print 1099s and 1096 forms
Edit, void, and delete transactions
Enter general journal entries
Track fixed assets
Memorize and schedule transactions to be automatically entered
Close the year and enter special transactions for sole proprietorships and partnerships
Set the closing date to lock the company file 33