Recording and Tracking Prepaid Expenses
In business, there are many occasions to pay more than one month ahead. You might pay for six months of insurance, pay an attorney retainer fee, or pay ahead on your rent. In order to keep accurate account of expenses, it is important to record prepayments as assets rather than expenses.
Prepayments as Assets
It is natural to think that when money goes out, your business has incurred an expense. However, many transactions are really a trade of one asset for another. A common example of this is when you trade money for property. In this case, total assets have not changed, nor have you incurred any expense. You simply increased one asset and decreased another.
It is the same with prepaid expenses. After all, you have not paid for any good or service, as none has yet been rendered. You have simply paid a deposit which you can use later. It's a little like putting money in a special account.
One of the benefits of using an OCA (other current asset) account to record prepayments is the ability to track them. The video in this post explains how to make a custom report that you can refer to any time you need to see the balances of any prepayments. Keeping prepayments together this way helps these prepayments not go to waste.
GAAP stands for Generally Accepted Accounting Practices. These practices are important to follow if you report to any other agency, such as the IRS or shareholders. While there are various ways to record prepayments, this way conforms to GAAP.
I made this 6-minute video because that's really the easiest way to explain how to do something in QuickBooks. However, the main idea is this:
When you make a payment of any prepaid expense, use the account "Prepaid Expenses" instead of an expense account.
When you enter a bill, in the category use "Prepaid Expenses" and make the amount the negative of the bill or the negative of the balance of the prepayment, whichever is less. For example, if the bill is $200 and you have prepaid at least that much, enter -200 on the line with Prepaid expenses. Then enter the bill amount with the appropriate expense in the category grid or use the items grid if appropriate.
To view balances, go to the balance sheet and click on the balance of Prepaid Expenses. Customize this report to show all dates, sort by vendor, and filter by the "cleared" status: Uncleared. Remove unneeded columns and adjust the title as desired. Don't forget to save this customization!
In order to remove zero-balance prepayments (ones that are used up), reconcile the account. Put in "0" for the ending balance and only select the prepayments that are completely used up and the bills that used them up.
That's it. If you know QuickBooks Online well enough that that made perfect sense to you, then there's no need to watch the video. Otherwise, however, the video may help.