Prepaid Expenses

I have seen several individuals post about this and I have not really seen a sufficient answer yet. Many threads and tagged videos do not work anymore.

I need to know how the system handles basic prepaid expenses and why it treats them differently. For some reason in the chart of accounts I do not see a prepaid asset account which is a little strange based on the other default accounts that are included.

For my example, I have Insurance that covers August - February for a total of $1,000. This should be a piece of cake and fairly simple. We are prepaying for an asset (insurance) that will be applied each month it is used. Therefore, we need very simple entries to begin this process and very simple entries to continue this process until it is depleted.

The first entry should be very simple:
(dr) Prepaid Insurance (asset) 1,000
(cr) Cash 1,000

This shows that we paid for the asset in full. However, to comply with accounting principles we only expense what we use when we use it. So, each month that we USE (expense) that asset (prepaid insurance) we have to show that. This is very simple. Divide the total ($1,000) by the number of months we use it for (6 months) and apply that amount to each month it is used. Therefore, each month we should have the same exact entry until it depletes. That entry is as follows:
(dr) Insurance Expense $166.67 (1,000/6)
(cr) Prepaid Insurance (asset) $166.67

This is actually extremely easy to do with basic journal entries. However, the issue is that the accounting team has to keep track of that manually, which to me is not a problem. However, I don’t see the logic in having to create all these advance payment entries to invoices to knock-off things and so on and so on which are the ‘answers’ and ‘solutions’ I have seen elsewhere.

To me, it feels like so much more work having to do it that way rather than just going into the Journal Entries and making the VERY BASIC entries that I need month to month. Doesn’t the system easily account for prepaid expenses, expensing them each month automatically?

Can someone give a detailed process to how they handle basic stuff like this? I get the accounting, but I do not get the software.

@Botanium I noticed you may have been looking for the same answers so I tagged you here.

Have you tried Auto Repeat ??

No. I was not sure where to even begin because I have seen several different solutions that don’t seem ideal.

Are you saying to make a Journal Entry and have it auto repeat? I know there is the subscription part where you can put a start and end date, but just the entire process seems bizarre and convoluted.

@centaur Actually, this may be a solution. I don’t think I have access to customize forms at the moment, but when I can do that I will see if this works. It is saying that I have to make the first Journal Entry to set it up but that is totally fine.

Other solutions have been avoiding Journal Entries and as ERP should be super streamlined, I didn’t know if there was a better flow for the process. It seems that this just needs to be done the oldschool way of utilizing a Journal Entry and setting up a recurring transaction.

We will see if this does the job later.


Hi. Did you try this?
I guess that is what your need.

This is working. However, deferred expenses scenario is not that simple. Consider the following:

  • you have purchased an Internet domain subscription for 5 years and paid fully at the time of subscription. For the sake of simplicity, let’s say the transaction is on the first day of July.
  • So you have 0,5years of deferred expense in the current accounting period and you need to post costs to following months. (that is easily done and observed)
  • However, on January 1st of next year, you need to deduct from long term expenses (not directly, first by transferring the costs to new year’s short term expense accruals account) a total of 1 year’s submission cost, post costs in the new year each month.
  • Next year, you need to do the same.
    This simply does not work. Even though, you may divide the purchase lines and try to observe the January 1st transaction each year, but automatic posting of short term accruals for the following years is not yet possible.
    I hope I made the case clear.

There should be Long Term Deferred Expenses and Short Term Deferred Expenses accounts. Long Term account for accruals beyond the current Fiscal Year, and the executable should transfer the annual sum to the Short Term account at the beginning of each year. This transferred amount also need to be processed as s Short Term Deferred Expense.

Fair point. But I do not believe we will be encountering any expenses that cut into long term scenarios like that. However, I agree that the function should be there. I just thought there was a much easier way for the ERP to process this other than just doing the JE’s myself.

Is this just for your company scenario? Maybe a country setting? Long term expenses should either way be booked separately than expense accruals in the running fiscal year. I don’t think it is that hard to implement.

I agree that there should be a long term vs short term. This is a company scenario and a VERY simple one. I just did not know how ERP handled it and to me, it is way easier to just book the journal entries myself (coming from an accounting background). Here, I will likely not have any long term deferred expenses. I am looking at basic bi-annual car insurance premiums so nothing too complicated at all. Just trying to learn the system and make things efficient as possible!

Thanks for your time!