CPA Bill Hanna shows how to adjust all three financial statements in under five minutes when a $50,000 recruiter fee needs to be accrued. A single journal entry debits R&D expense and credits accrued liability, which flows through the income statement as increased loss, the balance sheet as reduced retained earnings, and the cash flow statement as a non-cash adjustment.
Imagine you're the controller or the CFO at a company and you just finished closing the books for the year 2025, and now you're ready to share your financial reports with investors and the board of directors when you get an email from your CEO that reads the following: Bill Hanna, I wanted to inform you that we have successfully filled the VP of Engineering position that we had open since December 2025. The candidate formally accepted our offer on December 28th, 2025. As a result, we are now obligated to pay the recruiter's fee of $50,000. The liability was incurred on December 28th and should be accrued accordingly. Please ensure that the recruitment expense and related liability are reflected on the financial statements for the year ended December 31st, 2025. Let me know if you need any supporting documentation. Okay, so now that throws a bomb on your financial statements. It means that you're missing an accrual of $50,000 that you have to record for for December 25th. Now you have two choices. Option 1 is to go to the accounting software or ERP, open up the financial period and record the journal entry, and then run the financial statements again. Option B, which is what we'll do here today, is to topside your financial statements with a journal entry, which takes less than 5 minutes. So let's go ahead through an example and see how it goes. Okay, so we are looking at the set of financial statements that I was ready to share with investors for Wakanda Power Inc. I have the income statement, the balance sheet, and the cash flow statement. Now, the first thing I'm gonna do before I go ahead and topside my financials is ask for, uh, an actual support from my CEO. So I'm gonna ask him for the agreement that shows that we are liable for $50,000, just so I have support here for what I'm doing. Okay. So basically what we need to do here is look at where in the financial statements the accounts that are going to be affected. So when you accrue for an expense, you debit expense and credit accrued liability. So essentially when you look at the income statement here, we hired an engineer, so it's going to be in research and development expense. So this is going to be affected. The second portion is going to be in the liabilities section of the balance sheet. So I have here accrued expense liability. right? And then what else is going to be affected? So on the cash flow statement, this is going to change my net income or loss because we added an expense, right? And it's going to change here, this item here, change in accrued expense, because we changed the liability. Overall, there's no change in cash. This is important to note. Nothing here happened with cash because we're only accruing an expense as a liability for the year. No cash went out the door for 2025. It's going to get paid in 2026. So no change on the net effect on a cash flow statement. And this file here, by the way, is going to be available for download. Go ahead and get the link down below in the description. All right, so let's come up with the journal entries that we're going to topside the financial statement with. So the debit is going to be to an expense account and the credit is going to be to a liability. So credit accrued expense liability. Okay. The amount is going to be $50,000, as we said. Right, for the debit and the credit. Okay, so now that we have the debit and credit, let's go ahead and implement it on the financial statements. So for the expense, we'll go to the income statement and we'll increase our expense line for research and development because we hiring an engineer in this case. That's going to be an increase of $50,000 expense. So we'll just add $50,000 and notice that's going to go and increase our net loss here on the income statement. Now let's go to the cash flow statement. And because we are going to change our accrued expenses, I'm going to delete my changes in accrued expenses here, and I'm going to go ahead and redo that after I change my accrued expense liability. So let's book our accrued expense. So we're going to increase that account as well by $50,000. And notice that's going to mess up the balance of the balance sheet because always our assets have to equal to liabilities plus owner's equity. So I have a check down below that's checking for this balance. So what we'll do to fix that is we'll change our retained earnings because remember, we are now incurring more expense, so we have a net loss. We need to reduce our retained earnings, which tracks all of our accumulated earnings in the business. So in retained earnings, we'll go ahead and subtract $50,000. Okay, and that's going to bring our balance sheet to balance. And before we continue, if you're liking my teaching style, you're going to want to check out the Controller Academy, where I teach you the entire accounting cycle at a corporation with an example company, and you will earn 10 CPA credits in the process. Go ahead and check out the link down below. Okay, so we've taken care of the income statement and the balance sheet, and now we'll move our attention to the cash flow statement. So the cash flow statement tracks, begins with net income or loss, which is in this case a loss of $410,000. And that changed automatically because we are linking it to the amount of net loss on the income statement. Now, after that, it adds non-cash items like depreciation. If you have any amortization, it will show up here and then changes to your working capital accounts, accounts receivable, inventory, accounts payable, etc. The one item that changed here is a change in accrued expense, right? So we'll go ahead and expand our balance sheet because we have two years here. We have '24 and '25, and you have to just subtract the difference in the balance in accrued expenses between the two years. So here, in order to track that, you'll say equals to accrued expense in 2025 minus the amount in 2024. And that's going to bring our cash flow statement to all the changes in operating account to net cash from operations of $480,000. And with that, you have topsided your financial statements with a journal entry that took you probably a few minutes instead of going into the accounting software and making all the necessary changes there. I wanted to give a big shout out to our recent CFO-level members of the channel. Dan Schneider, Pacha 5361, and Vincent Truth 1898. Thank you guys for supporting the channel. If you didn't know, you can become a member of this channel. You'll get tons of perks beside supporting the channel so that I can continue to do the work that I do. Okay, so this has been the way to topside the financial statements. This file again is available for download down below. If you like this video, go ahead and give it a big thumbs up. And I'll see you in the next video.
