Handling prepaid expenses in QuickBooks

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Handling prepaid expenses in QuickBooks

Accountants, bookkeepers, and other professionals use myriad methods to keep track of prepaid expenses in Intuit QuickBooks financial software. When something is paid in advance and must be expensed over one or more months in the future, accounting professionals must properly record the expense in a timely manner. The normal method for making this monthly entry is to use a journal entry (debit expense, credit prepaid expense).

Many businesses make use of one Prepaid Expenses asset account in which several prepaid expenses commingle. How does one keep track of the balance of each prepaid expense and when to make each journal entry?

If you’re thinking of using a Memorized Transaction, think again. In the following method, you don’t have to remember anything — let QuickBooks do the work!

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As an example, let’s use an annual insurance premium of $12,000. The premium is paid in total in December, to be expensed monthly starting January 1. Upon payment of the premium, the check is entered in QuickBooks to credit the bank account and debit the Prepaid Expenses (other current asset) account. The key is to then immediately enter twelve journal entries (one for each of twelve months in this case) crediting Prepaid Expenses ($1,000) and debiting Insurance Expense ($1,000). Now is the best time to make all necessary future entries and to check that they are correct. Make the same entry for each of the twelve months using the Duplicate General Journal function (under Edit), or memorize the monthly transaction and double-click it twelve times in the Memorized Transactions list (don’t forget to delete the memorized transaction when finished). However you decide to do it, the important thing is to enter ALL of the entries NOW.

Important reasons for making all of the entries immediately after entering the prepayment are

You will not have to remember to do the entries in the future, and you will not have to double-check that a memorized transaction has been entered every month.
The entries will not show up on reports until the report date range includes them. Conversely, if you want to view reports for future dates, the transactions are already there to populate the reports. The ability to enter future transactions into QuickBooks and have them appear on reports only during the appropriate date range is one of the most under-utilized strengths of the QuickBooks accounting software.
Most importantly, when all journal entries are made immediately and accurately, the total balance of the Prepaid Expenses account should always be zero and appear as such on the Chart of Accounts list. The appropriate non-zero balance will appear on dated reports such as the Balance Sheet (as noted above).
The zero balance provides simple and clear confirmation that each and every prepaid expense has been accurately entered and expensed over time. The zero-balance verification will also allow you to account for penny differences after you’ve entered all of the journal entries; i.e. most prepayments are not perfectly divisible by the number of months, and the last journal entry in the series must often be adjusted slightly.

When done correctly, the Prepaid Expenses account balance should always show as zero on the Chart of Accounts list no Phyliis Panzeter, PhDmatter how many prepaid expenses have been entered.

How to Do a Report on Prepaid Expenses in QuickBooks?

Viewing reports in QuickBooks helps your company to gain a broader understanding of how money flows into and out of an account. You can create an expense report on an account by account basis. Take advantage of the QuickReport feature in the Chart of Accounts section of QuickBooks to create a report on a prepaid expense account.

How to Record Prepaid Expenses in Your Books?

Sometimes, you pay for business goods and services before you use them. These kinds of purchases require special attention in your books. Do you know how to record prepaid expenses? If not, follow this simple guide to accounting for prepaid expenses to keep your accounting records accurate.

What is a prepaid expense?

Prepaid expenses are when you pay for items that you will receive in the near future. When you pay for something before you receive it, you gain a prepaid expense. Prepaid expenses do not provide value right away. Instead, they provide value over time.

Prepaid expenses expire as you use them. For this reason, you cannot expense the entire value of the item immediately. You must record a prepaid expense in your business financial records and adjust entries as you use the item.

What are prepaid expenses in small business?

Small business owners make many purchases that are considered prepaid expenses. Any time you pay for something before you use it, you need to recognize a prepaid expense in your books.

The following list shows common examples of prepaid expenses:

Paying rent before using a commercial space
Small business insurance policies
Equipment paid for before use
Salaries
Taxes
Some utility bills
Interest expenses

Is a prepaid expense an asset?

Prepaid business expenses are initially recorded as assets. Prepaid expenses on the balance sheet should be shown as assets.

Expense the item over time as you receive its benefits. As you use the item, decrease the value of the asset. The value of the asset is replaced with an actual expense recorded on the income statement. Once the item is used, it is an expense.

Journal entry for prepaid expenses

You record prepaid expenses as assets on the balance sheet at the time of purchase. Record the prepaid expenses journal entry in your books before using the good or service.

To begin posting journal entries for prepaid expenses, first debit an asset account. And, credit the cash account (or whatever account you used to pay). You increase the prepaid expense asset account and reduce the cash balance.

Expenses need to match revenues when an expense contributes to revenue. That way, you recognize the expense when the benefits tie back to revenue.

As you use a prepaid item, remove its value from the asset account on the balance sheet and record it as an expense on the income statement. The expense you record is the amount associated with the accounting period. Each time you record an expense, the asset account gets smaller and the expense account becomes larger.

For example, you prepay six month’s worth of rent, which adds up to $6,000. When you prepay rent, you record the entire $6,000 as an asset on the balance sheet. Each month, you reduce the asset account by the portion you use. You decrease the asset account by $1,000 and record the expense of $1,000.

Once you use the prepaid item, the asset account should be empty, and the expense account should show its full value.

Adjustments for prepaid expenses

Adjusting entries help to balance your books. They do not show new business transactions. Instead, they adjust a previously recorded transaction. Use adjusting entries to recognize expenses in the period you incur them.

To recognize prepayment expenses, use adjusting entries. You create an adjusting entry when you debit the actual expense account and credit the prepaid expense asset account. The entry reduces the asset account and increases the expense account.

Repeat the process until the expense is used up. Adjusting entries result in the asset account equaling zero and the expense account equaling the purchase amount.

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Examples of prepaid expenses

Prepaid expense journal entries help you keep your accounting books accurate. Let’s look at some examples of prepaid expenses.

Let’s say you buy a one-year insurance policy that costs $1,800. You pay upfront and use the insurance throughout the year.

When you buy the insurance, debit the prepaid expense account to show an increase in assets. And, credit the cash account to show the loss of cash.

In accrual accounting you may find it necessary to record certain transactions as prepaid expenses. You will then need to follow certain steps to properly record the prepaid expense in QuickBooks. A prepaid expense is a purchase you make for goods or services you will receive in the future or over a specified period of time. A good example of this would be insurance. Most insurance agencies require that you pay your premium in annual or semi-annual payments. In order to show more accurate financials that are not skewed by a large expense in one month it is necessary to use a prepaid expense. This will properly spread the expense over the entire coverage period that you are paying for. Another example of an expense you might want to consider prepaid expenses for is a quarterly utility bill. Watch this video which demonstrates how to properly handle recording prepaid expense in QuickBooks.

In accrual accounting you may find it necessary to record certain transactions as prepaid expenses. You will then need to follow certain steps to properly record the prepaid expense in QuickBooks. A prepaid expense is a purchase you make for goods or services you will receive in the future or over a specified period of time. A good example of this would be insurance. Most insurance agencies require that you pay your premium in annual or semi-annual payments. In order to show more accurate financials that are not skewed by a large expense in one month it is necessary to use a prepaid expense. This will properly spread the expense over the entire coverage period that you are paying for. Another example of an expense you might want to consider prepaid expenses for is a quarterly utility bill. Watch this video which demonstrates how to properly handle recording prepaid expense in QuickBooks.

What are the two methods for recording prepaid expenses?

The two methods for recording prepaid expenses have to do with the general ledger account that is initially debited at the time of the cash payment. The two methods or approaches are:

debit an asset account (such as Prepaid Insurance) which is the balance sheet method, or
debit an expense account (such as Insurance Expense) which is the income statement method.
The use of either method will almost always require an adjusting entry prior to issuing the company’s financial statements. However, the amount, the account that will be debited, and the account that will be credited in the adjusting entry will depend on the method used.

In short, either the balance sheet method or the income statement method for recording prepaid expenses may be used as long as the asset account balance is equal to the unexpired or unused cost as of the balance sheet date.