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!

Method in Practice

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

  1. 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.
  2. 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.
  3. 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.
 

Enjoy accrual accounting!

About the author:

Phyllis L. Panzeter, PhD, is a Certified QuickBooks ProAdvisor and President and CEO of Reality Check Inc., providing onsite setup, training, and troubleshooting for QuickBooks since 1997. Visit her at www.realitycheckonline.com.

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