22 of the Best QuickBooks Tips for Accounting for Prepaids

(And for Tenants Deposits)

In these 22 tips we will:

Define prepaids and review an ideal report (1)

Explain an effective and efficient way to account for prepaids and to memorize transactions to save you time. (2)

Demonstrate how to create a memorized report that will provide all the information you need to manage your Prepaids each month, quarter or year, (3)

Explain why and how you should reconcile the prepaids (4)

Define where else you may be able to use the features set out in these 22 tips. (5)

Definition of prepaids (1)

  1. Prepaids are costs incurred for future benefits or services that are amortized over the period of use of such benefits or services. Examples are prepaid insurance, prepaid computer maintenance, annual service payments entitling us to computer program enhancements, etc.
  2. Prepaids differ from Deferred Charges: a prepayment is an amount incurred or paid for services not yet received or the benefits of which have not been fully realized; a deferred charge is for services or goods already received, but the income against which such costs are to be matched will not be received until a future period.
  3. The following sample reports the cost, monthly amortizations, and prepaid balance as of the report date of each prepaid, and we can print this each month end or whenever we need to view it:

SEECAC Accounting

Features of the above report (1.1)

    1. This is an example from our files so that we could show you how the system works. The first line is the Company’s name from the QuickBooks Company Information. Then we have the title of the report; we have a system for creating, naming and memorizing reports that is set out on the See Clearly Accounting web site: “22 of the Best Tips for QuickBooks Memorized Reports”.
    2. Other features of this report include:
      1. The 3rd line of the title requires considerable explanation which will not help you understand this system for monitoring prepaids. Let us share with you that it relates to Objectives or Purposes of preparing the report in connection with our work on compiled financial statements we prepare for clients.
      2. We have chosen to print this report by Class of prepaid, which is shown on the left as headings for each prepaid.
      3. For some prepaids you see the Main Class and the sub class because we chose to print the first Sub Class.
      4. For each prepaid we purchase, our usual method of describing the purchase is the expiry date and the period the prepaid is effective for (2016 11 5/5 yr or 2016 11 – 5 yr) then we describe the purchase. We want to see the expiry information first.
      5. We have experimented with a few formats and the choice that we made is not the favorite of all users. We will describe our logic in the “Recording transactions” section, and let you decide.
      6. The column titles of the report include: Type of transactions, Date, Num, Name of vendor, Memo, Debit, Credit, Balance. See the sample report in the Reconciliation section for one that includes the Class column.
      7. Debit is for the purchase of the prepaid.
      8. The Credits are for the amortization, most of which are for a year, that is 1/12 each month. Later, in this document, we will describe how we do this automatically each month or year until the prepaid is fully amortized.
      9. We use our prepaids to keep track of some minor assets, for example, the $100 we pay every 5 years for a domain name. Because they are minor, we record 1 annual amortization amount (almost $20) once a year. But we have great control over our domain names.
      10. At the bottom of the report, we have a total. This total agrees to the GL.
      11. The amortization recorded will tie into the expense accounts of the PL; remember there may be other entries charged directly to the expense account.
      12. It is very easy to test the unamortized prepaid balance. You can either look at (1) the date purchased and the amount and notice that amortization has been recorded each month, or (2) you can quickly figure out the number of months pending to be amortized and do a calculation to test the prepaid balance. After using this method for a while, you seldom bother checking prepaid balances.
      13. When we are preparing monthly financial statements, we print only the transactions for the month just to confirm that amortization was recorded. Of course the report is much shorter and we print it in portrait mode. When we print only for a month, we need to enter a date in the From field; see the next point with no date entered in the From.
      14. SEECAC AccountingThis report discloses all beginning balances of each account, all unreconciled transactions from the day we started to January 31, and the closing balance. Notice the dates of the report: we have no data in the From ______ field. We have a date only in the To 1/31/13 field. This governs the date display of the data presented in the report. These fields normally appear on the top of the report.
  1. How do we prepare this report? We will explain shortly. First we will explain how to set up the entries so that the correct entries will appear in the report.

Recording prepaid expense transactions and memorizing them to save time and increase accuracy (2)

  1. All the recording of Prepaids is done when you record the initial purchase of the prepaid; (1) as soon as you record the initial purchase, (2) you determine the amortization, (3) leave your calculations on the vendor’s bill; (4) prepare the memorized transaction to record amortization and (5) memorize it. Let’s look at the process in more detail:
      1. Record the purchase:
    SEECAC Accounting
    1. The start of the memo, which describes the purchase, reports the year month day the prepaid expires followed by a dash or a slash to indicate the period or the term. This is important for someone performing a review of your accounting records.
    2. Here we will discuss our policy for recording expiry dates and recording the term (one year, one month, 5 years). Usually we record (1) the expiry date, for example 2014 01 06 (year month day), (2) a dash or a slash, and (3) the term. For some of our expiry dates, we use only the month: for example 20?? 01. We start to fill the date for the year but do not complete it. We do this because whenever we renew, we set up the new amortization. Some times when a prepaid may not be fully amortized by the date we are required to pay for the new one; we find that our system flows better by setting up a new Class rather than a year with two wild cards. Some times we know that the prepaid expires on the end of the month; in these situations, we don’t bother with the day.
    3. On the vendor’s bill, calculate the amortization. For example, write $3,204 / 12 = $267 to get your monthly amortization. With few exceptions, we amortize for a full month in the month of purchase; but if it is only 3 or 4 days, we may not start until the next month.
  2. Create the transaction to record amortization and memorize it:
    1. Click Company> Make General Journal Entries or click Accountant> Make General Entries
    2. Enter the date of the first entry for amortization that you want to record
    3. Entry number: enter your initials and 001 so that your entry numbers will be unique even if the entry is processed automatically, the system will increment the entry number each time it records it.
    4. Click off the Adjusting Journal Entry, unless it is a year end AJE
    5. Cursor to the Account to enter the Credit to Prepaids. The first account is 14050, the prepaid account, (the account you use in your records). Cursor to the credit field and enter the amount $267.00, in this example. Cursor to the memo field and enter a clear description: expiry (2014 01 06), the term (1 yr), monthly amortization liability insurance. Cursor to the vendor and select your vendor (AICA Services in the example) and select the correct class (Pd Ins Liability 2014 01 06-1yr CICA).
    6. SEECAC AccountingRepeat the same steps as above for Debit, account number 83405.
    7. DO NOT CLICK SAVE & CLOSE or SAVE & NEW. You must memorize the transaction and then you are going to CLEAR the entry and rely on QuickBooks to process the 12 transactions.
    8. Click Memorize. Drag the Memorize Transaction screen down so that it is just below the last line of the journal entry. See the next display.
    9. Give the memorized entry a clear name. Our policy for naming prepaid Classes is to (1) assign the Prepaid to a Control or a Group (each Group starts with Pd, for Prepaids) and (2) to assign a sub account name that starts with the expiry date and continues with detail, usually the vendor and the product. For the Memorized transactions our policy is to name it as follows: Pd, the vendor and product, and then the expiry. We think the vendor and product will make it easier to work with than the expiry date (which we use for Classes). See Appendix 2. If you would like to correct our logic, we would be pleased to receive your suggestions.
    10. Click Automate Transaction Entry
    11. How often: monthly, or whatever period you will amortize the prepaid
    12. Next date: the first date you want this amortization entry recorded.
    13. Number remaining: 12 months in this case
    14. Days in advance to enter: 15, you may choose more or less. Let’s see what we have:
    15. SEECAC AccountingNote the Memorized Transaction screen appears on top of the Make General Journal Entries screen.
    16. Click OK to memorize the Transaction.
    17. Click Clear to clear the entry you created then memorized so that it will record for 12 months. You don’t want it to record for 13 months.
    18. Each time you open QuickBooks, after the Next Date (or the Days in Advance), you will be asked if you want to record the memorized transaction entry. You can also record a memorized transaction by right clicking it on the Memorized Transaction List.

Setting up prepaid Classes (2.1)

  1. In Appendix 01, we have a listing of our prepaid Classes. We have two levels of Classes, a control and a number of sub classes under each control. Each of the sub classes start with the expiry date, which may be only a month because we use wild cards in the 4 digit year but the Class continues with the vendor name. We have had no problem over the years finding Classes, but if you have a better idea, please send us an email.

Preparing documentation for your beloved chartered accountant (2.2)

  1. Now that you have all this information in your hands, to avoid having to search for it when your Chartered Accountant shows up, make a copy for her now: the vendor’s bill (with your notes on the amortization calculation), the amortization entry with the copy of the memorized transaction.

Creating the report and memorizing it so that it is available whenever you need it (3)

  1. You may be able to prepare this report from the 22 of the Best Tips for QuickBooks Memorized Reports. But let’s summarize what you would do.
  2. Before we proceed with setting up a memorized report, let’s set up some memorized report groups so that we will have some place to save the report when we memorize it.
    1. Click your shortcut icon to your memorized reports.
    2. On the bottom left, we have a Memorized Report icon, click it to see New Group, click it and key in P or PBC Reports Prepared by Client for Accountant
    3. Repeat that so you can set up another group for Pd Prepaids
  3. Now we will set up the report. If you have a similar report setup, it would be great to load it, modify it, and save it. We are going to assume that you need to start from scratch.
    1. Click Reports> Accountants and Taxes> Trial Balance, cursor down to the account you want to report on, in this case 14050, place the cursor on the balance and double click
    2. The starting point in setting up a report is the header = it is the objective of what you are going to print: on the top left, click Customize Report> Header/Footer> Report Title – then key in the report title = P 14050 GL Prepaid Expenses Total by Class. If you are preparing a report to be used for your working papers, we suggest that they be included in the P/PBC memorized report group and that you add your index to the end, in this case L.1. Click Filters.
    3. In Filters, select Account. Click the Choices down arrow of the Account field and click 14050. Just below that you will be asked if you want to Include Split Detail (that is the other ½ of the entry) = No, because you don’t need it and the page will be too crowded. Another time you may need it.
    4. Click Fonts and Numbers and present negative numbers In Parentheses. It is probably not necessary here because we are presenting Dr, Cr, Balance. But where you choose Amounts (one column with Dr and Cr, you would probably use the In Parentheses choice).
  4. Now click the Display icon to state what you want to view when you print.
    1. Let’s deal with the Dates first of all. Most will be for Last Month, which will allow you to see only the last month. For now you don’t want any From date; you want only the To date. You want to see the history of your Prepaids, both the purchases and the amortization. But you may have some prepaids that you have paid and fully amortized in a previous year. We will cover that solution in Reconciling the Prepaids, later. If you have a date in From, delete it.
    2. Cursor down to the Columns you want to display. You need all the space you can get for the must see report information. You don’t need the first choice, Left margin. Click it so that the tick mark disappears. You will want tick marks beside: Type, Date Num, Name, Memo, Dr, Cr, and balance. We don’t think you need Class because it will be the same as the Class that will print as a sub title on the left when you choose to total by Class.
    3. Later when we have it set up the way we want it, we will memorize it. Then we will create a second copy by renaming it to Pd 14050 GL Prepaid Expenses Total by Class, and saving it in a different group (Pd). We originally started saving reports twice because one might become inactive, and we keep doing it because users have different preferences.
  5. Click OK to view the report. It looks like a GL printout. We want to see the totals by Class. Click the choices arrow of the Total By and choose Class.
    1. There is still on point missing. We don’t want to see a transaction if it has been cleared or reconciled. First let’s go back and select the Cleared column to see what we see. Click Customize Report> Display and select the choices arrow for Columns. Click Clr.
    2. Now when you look at the report, you see a bunch of transactions with tick marks beside the. We don’t need to see these.
    3. SEECAC AccountingClick Customize Report, and go to the columns again and click Clr so that it does not appear.
    4. The last feature you want to enact to have this report print clearly and to show only what you want to see is to click the filters icon and cursor down to Cleared and put a tick mark beside it and then click NO.
    5. Now look at your report.
  1. You will have to adjust the column widths by dragging the diamonds beside the column headers so that each column is as wide as it should be
  2. We need to have the report present the information so that it is meaningful. Print your report. Make sure you save it by memorizing it and saving it in the correct group (P or PBC) = defined by the prefix of the report. Use Customize Report to change the heading to start with Pd (delete the P) and delete the index, L.1, at the end. Memorize this to the Pd report group.

Reconciling your prepaids (4)

  1. We made reference to reconciling prepaids in the previous section about creating a memorized report.
  2. QuickBooks enables its bank reconciliation features to reconcile most balance sheet accounts.
  3. When do you do this? Only after the end of your fiscal year. You don’t want to reconcile before that because you will lose your neat tie in and support for your expense accounts that include the amortization of the prepaids. Remember to reconcile after the fiscal year end.
  4. And when you reconcile, you reconcile per the purchase of a prepaid. Let’s look at a prepaid Class that needs reconciling.SEECAC Accounting
  5. For example if you are going to reconcile Video Tax News, you will reconcile the 09/13/2010 purchase of $325 and the 12 monthly amortization amounts that relate to that purchase. The problem is that you have 12 amortizations of $27.08; this equals $324.96. It won’t reconcile. It will be out by $.04. We could force it but our preferred method is to record another $.04 of amortization in the current month (because we have already closed our prior year and the last month that we have prepared financial statements for). When we record the $.04 to the expense account, we want to make sure we use the correct expense account. To ensure we do that, we will view the above report (for the Prepaid class we are reconciling and for a period after the last Closing Date) and double check the last entry and enter additional lines to the journal entry to cover the little differences of $.04; for this reconciliation, we would record 2 entries, one for each Prepaid we are reconciling. Here is how you reconcile a prepaid account:
    1. Click Banking > ReconcileSEECAC Accounting
    2. Choose the account 14050 Prepaids
    3. Enter the Statement Date – this should be after a year-end and should be in the current month after the closing date.
    4. Enter the Ending Balance – this should be 0.00
    5. Click Continue
    6. The reconciliation transactions will affect prior amounts (but only to Clear, or Reconcile, them; not to make any changes to the amounts) and so you must know the Closing Date password and enter it.
    7. All you are doing is reconciling, you will not change any prior period balances by reconciling. You will be reconciling a $.04 entry in the current period but it is a new entry; it does not affect the prior periods. You may see a very long list of outstanding cheques and payments (amortization entries) and Deposits and Credits (purchases)
    8. Note: To do this work effectively, make sure your report for the items you will reconcile (to zero) reveals the complete cheque number / journal number, because you may have some amounts that are the same.
    9. Click the Amount columns so that the items are in amount order
    10. From your report go to the reconciliation and click the prepaid purchase
    11. Now click the amortizations of the prepaid until you have them all clicked for the prepaid purchases that you are reconciling. Be careful to select the correct amortization if you have a number of amortization entries of the same amount.
    12. When your difference is zero (0.00), click Reconcile Now
    13. If you have more Prepaids and amortizations you want to reconcile, do them ONE purchase at a TIME.
    14. When you have finished reconciling, renter the Closing Date to the date of the most recent monthly financial statements.

What other accounts could we use these prepaid techniques on? (5)

  1. If you have rental properties and tenants pay you deposits, you could use these techniques. The tenant or each tenant renting the unit during the year would be listed as a customer (similar to the vendor in prepaids) and each unit could have multiple tenants each year (the units would be the prepaid classes in the prepaid system just discussed). You should reconcile before the end of the year (this differs from the prepaid system where you would not reconcile until after the fiscal year).

Appendix 01 – Classes Setup for Prepaids

SEECAC Accounting

Appendix 02 – Memorized Prepaid Transactions

SEECAC Accounting