Prepaid Goods
Occasionally you might prepay for goods that you expect to receive within the year, for example, you ordered and prepaid for 10 cases of wine that will be bottled next year (often called "Futures").
To keep track of what you paid and what you receive when it comes in:
Record the initial payment for the wine in an Other Current Asset account, like the default account "Prepaid Expenses," so you can track the order until you receive it. Show me how
When you receive the goods:
If you owe a balance and are recording the payment of the balance:
Go to the bank account you are using to pay the balance of the bill.
Click Add Transaction, then choose Record a Payment or Purchase.
Enter the company you purchased the wine from in the 'Pay to' field.
Enter the date of the bill.
Enter the payment method used to pay the balance of the bill.
(Optional) If paid by check, enter the check number.
Enter the amount still due in the amount field.
Choose the Prepaid Expenses account and enter the amount of your initial payment as a negative value (the amount you paid when you created the prepayment).
Choose the other account(s) that best represent the items you purchased, for example, inventory asset, and any additional charges, like shipping.
The total of the goods received minus the amount of the prepayment should equal the total amount now due.
Click Save.
If you do not owe a balance:
Go to the General Journal (click the Accounts tab and under Bookkeeping links, click General Journal).
Click the Record Adjusting Entry.
Enter the name of the company you purchased wine from in the Contact field.
(Optional) Enter a reference number, like the bill number.
Choose the Prepaid Expenses account and enter the amount of your initial payment (the amount you paid when you first logged the prepayment).
Choose the other account that best represents the items you purchased, for example, inventory asset and any other charges, like shipping.
Click Save Transaction.
You have now used the prepayment amount from your Prepaid Expenses account and that amount is no longer available to use.
Prepaid Insurance
Other expenses you might prepay include insurance, say, for the year.
To keep track of what you have paid and what you have used of the prepayment:
Record the initial payment for the full year's insurance in an Other Current Asset account like "Prepaid Insurance." Show me how
Divide the initial payment by 12 to get your monthly premium.
Each month transfer the monthly premium from the "Prepaid Insurance" account to your insurance expense account using an adjusting entry.
Go to the General Journal (click the Accounts tab and under Bookkeeping links, click General Journal).
Click the Record Adjusting Entry button.
(Optional) Enter a reference number, like the month the premium was used, (for example, Mar 09).
Choose the insurance expense account and enter the amount of this month's premium in the Debit column (this increases your expense account).
Choose the "Prepaid Insurance" other current asset account and enter the amount of this month's premium in the Credit column (this reduces what you have left in your account).
Enter the name of the contact (the company you paid the premium to).
Click Save Transaction.
At the end of the year, your prepaid account will be zero and your expense account will reflect the full amount of premiums paid and used.