Year End invoice for future services.

SOLVED

Our web hosting is billed in advance by quarter.  I'm about to enter an invoice from May 1 for May, June, July.  Our fiscal year end is May 31, so only a third of this is an expense in the year being entered.

Is "prepaid expense" the correct place to put the other 2/3 even if it hasn't been "prepaid" yet?

  • 0

    Hi Greg,

    No, you want to accrue the other 2/3.  Then in June you will move 1/3 to the expense account and same for July.

    Jenn

  • 0 in reply to Jenn5353

    I'm not following.  I have an invoice from May 1 due May 30 (though it wasn't paid on time) for three months.  To me an "accrual" is for something that will be paid after the fact, not for something that's payable in advance.  You're saying "no" to calling it a prepaid.  So what do I put in the account field when entering the invoice?  I was thinking of putting one month as 5782 Internet and two months as 1320 Prepaid Expenses, but you're saying "no".

    We don't do a lot with monthly books.  Once I get through year-end, I'll expense the other two months directly.  But it's entering the invoice that's bugging me.  I want the invoice in one lump so it matches the cheque whenever she got around to paying it.

  • 0 in reply to Greg Goss

    Instead of using account 1320, there should be an account for "Accrued Payables" set up under current liabilities. Line 1 is correct.  Line 2 should say $104.90, no tax, to accrued payables.  

    Then, on June 1st you would make this journal entry:

    Accrued payables   Credit $52.45

    Web hosting            Debit $49.95

    GST paid                 Debit $2.50

    Then, on July 1st you would make this journal entry:

    Accrued payables   Credit $52.45

    Web hosting            Debit $49.95

    GST paid                 Debit $2.50

  • 0 in reply to Greg Goss
    verified answer

    Greg, I like your entry better than Jenn5353's.  There are reasons why her entry could be used but in this case, I would treat it as a prepaid expense as you have done, rather than an accrual to be invoiced later as she has done.

    Just don't forget to debit the GST Paid account when you post the general journal entry to the proper expenses account in June and July.  The 1320 Prepaid account should go back to zero after July's entry if nothing else has been posted there.

  • 0 in reply to Richard S. Ridings

    Hi Richard, could you provide more explanation as to why it would be treated as a prepaid instead of an accrual?  This questions has generated quite a discussion here at the office.

  • 0 in reply to Jenn5353

    The way I look at it is the invoice came in but was partially for expenses to be recorded in the future.  So it was a  prepaid expense because typically the expense would have been paid before the service was applicable.

    An accrual is where the invoice came in but was for a prior period of time.  An example would be at year end, the expense for payroll might be dated Jan 2.  But the pay period ending was in December.  You can post the expense back into the previous month by posting to Accrued Liabilities and then reversing it out the next month.  The same idea as with an accounting, legal or bookkeeping accrual for finishing up a prevous year.  The billing will come this year but the expense was for work for last year.

    A good rule of thumb that I use is, "does your original entry force the account balance up or down."  So you wanted to post to Accrued Liablities.  But the first entry was a debit forcing the balance of the account down.  Technically an accrual should be increasing the balance.  The subsequent month(s) should be reducing the accrual or the expense received in the next period should be posted to Accrued Liabilities instead of the expense, since the expense was taken the month before.

    So in my mind, for this particular purpose you should have been working with an Asset account because the first entry is a debit and that increases the balance of the asset account.

    Others may disagree but that's the way I look at it.

    Hope this helps

  • 0 in reply to Richard S. Ridings

    Another way would be to enter the invoice twice - first time as Inv 1234May2013, then again in the new year as 1234Jun-July2013. But I myself like to show expenses for the month it pertains to so I actually invoice the same invoice 3 times - one for each month.

  • 0 in reply to Smith and Co

    Smithco, you would not set it up as a prepaid and then do general journal entries for each subsequent month to get the expense to the correct month?

    Do you do 12 invoices for annual payments for insurance, memberships, etc?

  • 0 in reply to Richard S. Ridings

    For the annual invoices I do set it up as prepaid and expense thru monthly JEs. It just the quarterly ones that I do each month.

  • 0 in reply to Smith and Co

    Matters of taste.  I like one incoming document to show as one document in the system.  If we cared about monthly expenses, I would bring it into a holding acct then J/E that into expenses each month.  

    You want the expense to drill into an actual invoice.  I can see that, but it conflicts with other preferences I consider more important.

  • 0 in reply to Greg Goss

    Just curious Greg as I totally agree with the matter of taste comments - but you said 'other preferences that I consider more important'. Can you explain that a little bit? Just like to see how everyone else does certain things and reasoning behind it as sometimes it is new to me and I do change to new way if it fits me :)

  • 0 in reply to Smith and Co

    My choice is for one input document to enter the system as one document.  Moving the money around after it's in the system is done with JEs or maybe some kind of inside sales.  I don't like taking one invoice and faking up three invoices to fit our expense structure.  

    I'd really like to drill PAST the JEs into the original document, but that would be expecting an awful lot from a $150 program.  Spoiled by working on SAP in the nineties, but a multi-million dollar Y2K conversion is a long ways from a one-person company buying an accounting program at London Drugs.

  • 0 in reply to Greg Goss

    Thanks Greg - I understand now what you mean.

  • 0 in reply to Richard S. Ridings

    Richard, thank you for explaining.  :-)