Follow these steps if you have a customer who wants to spread the expense of an item paid in a single amount (i.e. insurance premiums, Yellow Page bill, etc.) over a period of several months in order to allocate expenses to the appropriate month.
QuickBooks Desktop for Windows
- Create an account to track the prepaid expense. Generally, this is an Other Current Asset account.
- From the Company menu, select Chart of Accounts.
- In the Chart of Accounts window, right-click anywhere, then select New.
- In the Choose Account Type window, select the Other Account Types drop-down, then select Other Current Asset.
- Select Continue.
- Enter the Account Name (Example: Prepaid Expenses) and other details, then select Save & Close.
- Enter payment to vendor using the account created in Step 1.
- Create a memorized journal entry to allocate one month or quarter of the expense.
- From the QuickBooks Company menu, select Make General Journal Entries.
- Enter the appropriate date for the first period. You can either use your own entry number or allow QuickBooks to auto-assign one.
- Debit the Expense account and credit Prepaid Expenses for the appropriate percentage of the total payment (1/6 if 6 months, ¼ if quarterly for a year). You can include an appropriate memo if you choose.
- Press Ctrl-M on your keyboard to memorize the transaction. Assign it a name (Example: Umbrella Insurance), and choose Automatically Enter. Select how often you want the entry recorded and the date of the next transaction. Also indicate the number of remaining entries.
- Select OK.
- The entries will record according to the frequency you selected, reducing the Prepaid Expenses account each period. The balance in the Prepaid Expenses account should be zero at the end of the coverage period.
- If the user has multiple prepaid expenses to track, it is suggested that they create sub-accounts of the Prepaid Expenses account in order to track each separately.
QuickBooks Desktop for Mac
- Create an account to track the prepaid expense. Generally, this is an Other Current Asset account.
- Select Lists, and choose Chart of Accounts. Select the plus icon (+) to create a new account.
- In the New Account window, from the Type menu, select Other Current Asset.
- Assign an account number (if used) and name (i.e. Prepaid Expenses).
- Enter payment to vendor using the account created in Step 1.
- Create a memorized journal entry to allocate one month or quarter of the expense.
- From the Company menu, select Make General Journal Entries.
- Enter the appropriate date for the first period. You can either use your own entry number or allow QuickBooks to auto-assign one.
- Debit the Expense account and credit Prepaid Expenses for the appropriate percentage of the total payment (1/6 if 6 months, ¼ if quarterly for a year). You can include an appropriate memo if you choose .
- Go to Edit, then select Memorize General Journal Entry to memorize the transaction. Assign it a name (Example: Umbrella Insurance), and choose Automatically Enter. Select how often you want the entry recorded and the date of the next transaction. Also indicate the number of remaining entries.
- Select OK.
- The entries will record according to the frequency you selected, reducing the Prepaid Expenses account each period. The balance in the Prepaid Expenses account should be zero at the end of the coverage period.
- If the user has multiple prepaid expenses to track, it is suggested that they create sub-accounts of the Prepaid Expenses account in order to track each separately.
FAQs
Debit the Expense account and credit Prepaid Expenses for the appropriate percentage of the total payment (1/6 if 6 months, ¼ if quarterly for a year). You can include an appropriate memo if you choose.
How do you allocate prepaid expenses? ›
Debit the Expense account and credit Prepaid Expenses for the appropriate percentage of the total payment (1/6 if 6 months, ¼ if quarterly for a year). You can include an appropriate memo if you choose.
How do you record prepaid expenses in accounting equation? ›
In accounting, these payments or prepaid expenses are recorded as assets on the balance sheet. Once incurred, the asset account is reduced, and the expense is recorded on the income statement.
How do you record prepaid expenses? ›
Prepaid expenses are recorded on the balance sheet as an asset, most often as a current asset. Over time, prepaid expenses are expensed onto the income statement.
What is the journal entry for prepaid expenses? ›
Such expenses which are concerned with the next financial year but have been paid in the current year are called prepaid expenses. Prepaid expense journal entry is recorded by debiting the particular expense and crediting cash.
How to record prepaid expenses in QB? ›
How To Record Prepaid Expenses in QuickBooks Online?
- Step 1: Set Up a Prepaid Expense Account. ...
- Step 2: Create a New Bill. ...
- Step 3: Record the Prepaid Expense. ...
- Step 4: Create a Journal Entry.
In double-entry bookkeeping, every transaction affects two accounts equally at the same time, where one account is debited and the other is credited. For prepaid expenses, the two main accounts you'll need to focus on are assets and expenses. These accounts are increased by debits and decreased by credits.
What is the journal entry for advance payment? ›
To record the advance payment in your accounts, debit the cash account and credit the customer deposits account for the same value. Debit increases expenses, assets (cash or equipment), and dividend accounts, while credit decreases these accounts and increases liability and equity accounts for your company.
What will be the original entry to record a prepaid expense? ›
Prepaid expenses are initially recorded as assets, because they have future economic benefits, and are expensed at the time when the benefits are realized (the matching principle).
What is the journal entry for expenses? ›
How Do You Record a Journal Entry for an Expense? To record an expense, you enter the cost as a debit to the relevant expense account (such as utility expense or advertising expense) and a credit to accounts payable or cash, depending on whether you've paid for the expense at the time you recorded it.
Reconciliation of Prepaid Expenses
Match the line items in the account to the supporting detail in the prepaid expenses amortization spreadsheet. If the supporting detail does not match the account balance, adjust the account balance with the approval of the assistant controller.
Can you record a prepaid expense without paying? ›
If you're using cash basis accounting, you don't need to worry about prepaid expenses. In cash accounting, you only record an expense when money changes hands. A prepaid expense will show up on your balance sheet as an asset, and as the asset is used, it will appear on your income statement as an expense.
What is the 12 month rule for prepayments? ›
Under the IRS 12-month rule, a taxpayer can deduct a prepaid expense in the current year if the rights or benefits for the taxpayer do not extend beyond the earlier of: 12 months after the right or benefit begins OR. The end of the tax year after the tax year in which payment is made.
What are the rules for deducting prepaid expenses? ›
General Rule for Deducting Prepaid Business Expenses
An expense you pay in advance can be deducted only in the year to which it applies. For example, if you pay a two-year lease in advance, you could only deduct the portion of the lease payment that applies to the current year.
How do you classify prepaid expenses? ›
A prepaid expense is a financial asset that businesses pay in advance for goods or services they will receive in the future. Prepaid expenses are recognized as assets because they represent a commitment that holds the potential to deliver economic value to your business in the days to come.
Do you add or subtract prepaid expenses? ›
A business can also deduct some prepaid expenses on its income taxes. If a business is looking to increase its deductions to help lower its taxes in a given year, prepaying for some of its expenses may be an effective strategy.
