A prepaid is a cost paid upfront that covers several months: a year of insurance, an annual software subscription, rent paid ahead. The day you pay, nothing has been used yet, so the payment goes to a prepaid account (an asset, usually Prepaid Expenses). Each month, that month's share moves to the expense, so every month's profit and loss carries only what it used.
Two more kinds work the same way:
- Unearned revenue: a customer paid ahead (a retainer, an annual plan). The money sits in a liability such as Unearned Revenue and is earned into income month by month.
- Accrued expense: an expense that builds up before its bill (property tax billed once a year, a year-end bonus). Each month books its share against a liability such as Accrued Liabilities; when the bill comes, record it against that liability.
Open Accounting > Prepaids & accruals. Pick a kind with the chips above the list, and add one with + Prepaid, + Unearned or + Accrued. Across the top: what the running prepaids cost, what is used so far, what is still prepaid, and what is due up to the last finished month. How this works beside the title opens a guide with the steps, a worked example drawn month by month, and the entries TaDa Books makes. It stays closed until you open it.
The three steps
- Pay it onto the prepaid account, not the expense. Record the payment as usual (a check, a card charge, or a bill you pay later), with its line on Prepaid Expenses. The money has left the bank, but nothing is used up on the day you pay, so nothing is an expense yet. No such account? Add one in Chart of Accounts as an Other Current Asset whose name says Prepaid.
- Schedule it. The payment shows up under To schedule. Press Schedule it and say the first month, how many months, and the expense account each month goes to.
- Post each month. Open Post and press Post prepaids. Monthly, or once at year end: the totals are the same.
Already put the whole bill on the expense? Open that bill or check, change its line to Prepaid Expenses and save. It then appears under To schedule.
Worked example: a yearly insurance bill paid in August
You pay $12,000 on August 3 for a policy covering August to July of the next year, and your books' year ends in December. In the window: Amount $12,000, First month August, Months 12, Insurance as the expense account. That is $1,000 a month.
| Month | Cash | Expense | Still prepaid | |---|---|---|---| | August | -$12,000 | $1,000 | $11,000 | | September to December | none | $1,000 each | $10,000 down to $7,000 | | This year | $12,000 out | $5,000 | $7,000 on December 31 | | January to July | none | $1,000 each | $6,000 down to $0 | | Next year | none | $7,000 | $0 |
- Is it an expense the day you record the payment? No. Recording it moves $12,000 from the bank to Prepaid Expenses, an asset. Each month's posted entry is what puts $1,000 of expense on the profit and loss.
- What happens at the year end? This year carries 5 months, $5,000. The other $7,000 is still an asset on December 31 and becomes expense next year, one month at a time.
- What never changes: the cash left in August, and the expense over the whole policy is $12,000. Put it all on Insurance in August instead, and this year shows $12,000 and next year $0: the same total, landing in the wrong year.
The entries TaDa Books makes
| When, and who | Debit | Credit | |---|---|---| | You pay the policy | Prepaid Expenses $12,000 | Bank (or Accounts Payable for a bill) $12,000 | | TaDa Books, each month end | Insurance $1,000 | Prepaid Expenses $1,000 | | You take a customer's payment ahead | Bank $6,000 | Unearned Revenue $6,000 | | TaDa Books, each month end | Unearned Revenue $500 | Service income $500 | | TaDa Books, each month end before a yearly bill | Property tax $300 | Accrued Liabilities $300 | | You record the yearly bill when it comes | Accrued Liabilities $3,600 | Accounts Payable (or Bank) $3,600 |
The figures are an invented example. TaDa Books never posts the payment or the bill itself: you record those as usual, and Prepaids writes the monthly entries.
What about taxes
These are your books' figures: an expense lands in the months it covers. A tax return can time it differently. For example, a US business that files on the cash basis may be able to deduct a prepaid covering 12 months or less in the year it pays it. Other countries and states have their own rules, with conditions, so confirm with your tax preparer.
Switching a TaDa Books report to Cash basis does not change the spread. The payment sits on Prepaid Expenses, a balance sheet account, so it is not an expense on either basis, and the monthly entries are journal entries, which both bases count. A Cash basis profit and loss also shows $5,000 this year in the example. Accrued expenses work the same way: their monthly entries show on Cash basis too. If your return deducts the payment when paid, that difference is your preparer's adjustment on the return. Some small businesses keep it simple and put a short prepaid straight on the expense; decide that with your preparer.
Schedule a payment
- To schedule lists the payments from the last 18 months that no schedule claims yet: money paid onto a prepaid account (an asset named Prepaid or Prepayments) and money a customer paid ahead onto an unearned revenue account (a liability named Unearned or Deferred Revenue). Press Schedule it and the amount, date, vendor and account come filled in.
- Not a prepaid takes a payment off the list (a deposit, say). Tick Show the ones marked not a prepaid and press Bring back to undo it.
- New prepaid adds one by hand.
In the window:
- What it is, and the vendor. The vendor goes on each month's expense line, so reports by vendor include it.
- The amount and where it sits: the prepaid account the payment went to, and its class.
- The months it covers: the first month, how many months, and the expense account (and class) each month's share goes to. The window shows the monthly amount as you type, and Months lists every month.
Whole months is the default: a policy that starts on the 15th counts that month in full. Switch the card to By the day and give the day it starts, and each month takes its share of the days: a year from January 15 gives January 17 of 365 days and runs to January 14 of the next year. Either way the months add up to the amount to the cent.
Paid before TaDa Books, or part already expensed
If part of the prepaid was already expensed (in your old books, or by hand in these), enter it under Used before TaDa Books: how much, and the month it runs through. TaDa Books carries on from the next month, so nothing is expensed twice. When a payment from To schedule has money already moved out of its account since it was paid, the window offers Count it as used.
Post the months
Open Post, pick the month (it starts on the last finished month) and check the list, then press Post prepaids. Each month becomes one journal entry dated its last day, with the reference PREP and the month.
- A month the books are locked for is never touched: its share goes into the first open month, marked Catch-up.
- Undo on the latest run voids its entries, while its months are open. If you already sent those months to QuickBooks, delete them there too.
- The entries belong to Prepaids: to change one, undo the run here or correct the prepaid, and the next run posts the difference.
Correct, stop, delete
- Correct a prepaid at any time: change the amount, the months or the expense account, and the next run posts the difference (negative when it goes down). Once months have posted, the prepaid account and its class stay as they are.
- Cancelled early? Pick the last month it covered and what happens to the rest: keep it when a refund is coming (record the refund as a deposit to the prepaid account), or expense it that month. Months already posted after it are reversed by the next run. Resume undoes a stop.
- Delete is offered only while nothing has posted.
If the payment a schedule came from is voided or deleted, or now puts less in the account than its schedules claim, the screen says so and runs leave it out until it is fixed. When the amount still stands (the payment was replaced by another entry), press Keep it on its own in the window.
Roll-forward
Roll-forward shows each schedule over the months you pick (the fiscal year so far to start): what it held at the beginning, what was added, what moved (used, earned or accrued) and the ending, with totals. It prints and downloads like every table.
Check against the books
Check lists each account's balance in your books beside what the schedules say is in it (for an accrual: what they have built up). A difference means a payment not scheduled yet, an amount moved out by hand, or a prepaid from before TaDa Books that is not in these books.
The list prints and downloads from every table, and the full books download includes prepaids.csv.