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.