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How to Record Prepaid Expenses in QuickBooks Desktop & Online

Recording of prepaid expenses in QuickBooks helps small businesses

Recording of prepaid expenses in QuickBooks helps small businesses to figure out the expenses of an accounting period and maintain the financial records.

Prepaid expenses is the amount paid in advance for the services/ products yet to be received by the business. Recording prepaid expenses in QuickBooks involves tracking advance payments made for services or products that will be received in the future. 

Prepaid expenses are marked as “assets” in the company’s balance sheet as they have future value. 

Examples of prepaid expenses

  • Prepaid rent 
  • Interest
  • Insurance
  • Legal retainers
  • Utilities
  • Advance Tax
  • Subscription

What are the benefits of recording the prepaid expense in QuickBooks?

Prepaid expenses are important to record in accounting because it helps businesses to manage their finances and have accurate financial statements. 

Benefits of recording prepaid expenses in QuickBooks

  • Expenses Distribution: The prepaid expenses helps the business to divide the cost of goods and service to avoid multiple accounting periods which helps the small businesses avoid sudden impacts on their financial statements.
  • Discounts: The discounts offered by the businesses for prepaying helps them to save a lot of money. Customers make advance payment, which benefits the businesses as well as the customers. 
  • Asset: Prepaid expenses are listed as assets on a company’s balance sheet because they hold economic value and will offer future advantages. 
  • Tax deductions: Prepaying expenses is one of the best strategies for businesses to manage their tax deductions as it potentially reduces taxable income and lower tax liability in the current tax year. 

How to record prepaid expenses in QuickBooks Desktop?

Steps to record prepaid expenses in QuickBooks Desktop

How to Record Prepaid Expenses in QuickBooks

Part 1: Create an “Other Current Asset” account.

Prepaid expenses or advance payment are current account items as they are expected to be realised within 1 year. The initial step is to create an “Other Current Asset” account in your QuickBooks account in order to track the prepaid expenses.

For Windows Users

Step 1: Navigate to Chart of Accounts

  • From the company menu, choose Chart of Accounts.
  • Right-click on the Chart of Accounts window and then click on New.

Step 2: Select the Account name and its type

  • Choose Other Account Types drop-down , then click on Other Current Asset on the Choose Account Type window.
  • Click on continue.
  • Now, enter the Account Name and other details and then click on Save & close.

For Mac Users

Step 1: Go to Chart of Accounts

  • Click on the list option on the screen.
  • Select Chart of Accounts.
  • Click on the plus icon (+) to create a new account.

Step 2: Designate the Account name and its type

  • From the New Account window on the screen, choose “Other Current Asset” from the Type menu.
  • Now, enter the account number (if used) and the name (i.e. Prepaid Expenses)

Part 2: Record Vendor’s payment details

Recording a vendor’s payment details is crucial for maintaining accurate financial records, ensuring compliance with tax regulations, and facilitating smooth audits.

Step 1 : Mention the vendor payment information

  • Keep all the payments sorted before mentioning it in the accounts.
  • Put the payment to the vendor using the account created in Part 1: Create an “Other Current Asset” account.

Part 3: Create a journal entry and allocate prepaid expenses

Creating the journal entry helps you keep track of where the money is going. You get the idea of how much you are spending on different categories in your business.

Step 1: Make Journal entries

  • Click on “Make General Entries” from the QuickBooks company menu option on the screen.
  • Put the appropriate date for the first period. [ You can either enter the date manually or allow QuickBooks to automatically enter the data ] 
  • Debit the expense account and credit the prepaid expenses for the percentage of the total payment. [ ⅙  – if 6 months , ¼ – if quarterly for a year ]

Step 2: Memorize the transaction  

  • Press Ctrl+M on the keyboard.
  • Designate a name and then select how you want the entry recorded.
  • Click on automatically enter (if you want the next transaction automatically )
  • You  also have to indicate the number of entries.
  • Click on Ok, once all the required information is confirmed.

Note:

The transactions will be logged based on the frequency you have chosen, which will reduce the Prepaid Expenses account each period. The balance in the Prepaid Expenses account should be zero at the end of the coverage period. 

If you have multiple prepaid expenses to track, it is recommended that you create sub-accounts of the Prepaid Expenses account to track each one separately.

How to record prepaid expenses in QuickBooks Online?

Steps to record prepaid expenses in QuickBooks Online

How to Record Prepaid Expenses in QuickBooks

Part 1: Access the Expense Option

Accessing the Expense option ensures that expenses are properly categorized and tracked, maintaining accurate financial records. Additionally, it helps manage cash flow and financial planning by distributing expenses over appropriate accounting periods.

Step 1: Open the Expense option

  • Click on the +New button.
  • Select the Expense option.

Part 2: Enter Payee and Payment Information

Entering Payee and Payment Information ensures that the transaction is linked to the correct vendor and helps in maintaining clear records for audits and future reference.

Step 1: Select the Payee and Payment account.

  • Once you click on the expense option, you will get an option to choose the payee.
  • Now, after selecting the Payee, choose the payment account.

Part 3: Record the Advance Payment

Recording the advance payment while recording prepaid expenses ensures that future expenses are accurately tracked and reported in the correct accounting period.

 Step 1: Pick Accounts payable

  • Move to the Category details section.
  • Select Accounts Payable (A/P) under the Category column.
  • Show that it’s an advance payment in the Description column.
  • Put the amount in the Amount column.

Step 2: Save the transaction

  • Once you are satisfied, Click on Save and close.

Conclusion

By properly recording prepaid expenses, businesses can manage their finances more effectively, ensuring accurate financial statements and benefiting from potential tax deductions. This process helps distribute expenses over multiple accounting periods, preventing sudden financial impacts and allowing for better financial planning and analysis.

By : July 8, 2024
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