Hey there, savvy ladies! When it comes to taking charge of our financial lives, understanding the nitty-gritty of accounting might not sound glamorous, but trust me, it’s a game-changer! One concept that can help us stay on top of our finances is prepaid expenses. So, gather ’round as we explore what prepaid expenses are and learn some practical techniques to track them like a pro!
What are Prepaid Expenses, Anyway?
Alright, ladies, let’s break it down. Prepaid expenses are like those smart investments we make in advance, but instead of a trendy new handbag (not that there’s anything wrong with that – no shame here, remember? 😇), we’re investing in something equally important for our business or personal life. It’s money we pay upfront for goods or services we’ll receive in the future – think annual insurance premiums, rent payments, or those subscriptions for software and apps that make our To Do lists soooooo much easier!
Why Tracking Prepaid Expenses Matters
Now, I get it – crunching numbers and journal entries might not be everyone’s idea of fun, but trust me, this is important to track in your books. Why? Because technically, prepaid expenses are an ASSET. Yes, something you spent money on is actually an asset, and that’s because you only use a little bit of it up each month. Were you to cancel your insurance or your software, you *should* receive a prorated refund for the portion you didn’t use. So that’s what we’re tracking here – the portion of the prepaid expense we’ve USED becomes the expense, and the portion we haven’t used is still an asset. It’s like knowing exactly how much money is tucked away in your favorite pair of jeans.
It’s ALSO great for your balance sheet and profit & loss statements when it comes to showing investors and banks. Someone who’s considering giving you money is going to lift an eyebrow when they see one month with a disproportionate amount of expenses month to month. It’s better to look consistent, plus, it’s the correct way to do it!
Practical Techniques for Tracking Prepaid Expenses
- Start a Prepaid Expenses Account – Easy Peasy!
First things first, open a separate account in your accounting software’s Chart of Accounts called Prepaid Expenses (or you could call it Prepaid Assets, whatever makes more sense to you). The account type is Other Current Assets and the Detail Type is Prepaid Expenses.
- Record Expenses as They Happen – Stay Ahead!
Ladies, timing is everything! When you make a prepaid expense, don’t wait around. As soon as that one-time payments shows in your bank feed, categorize it to the prepaid expenses account.
- Slice and Dice – Divide Expenses Over Time
Picture this: you’ve got a delicious cake, and you want to savor every bite. That’s exactly what we’re going to do with prepaid expenses! Instead of splurging all at once, we’ll divide the expense over the time we benefit from it. So, those yearly insurance premiums get sliced into monthly bites – yum!
To do this, just divide the total amount of the expense by the amount of months it covers. This is usually for annual expenses only, so divdie it by 12. For example, let’s say you purchased a business liability insurance policy for $600 that covers you for a whole year. That would mean the portion you use each year is $50.
4. Do your journal entry
Create a Journal entry at the end of each month, date it for the last day of the month. Debit the actual expense account in the amount you calculated above, and credit your Prepaid Expense account the same amount. In the example above, you would debit Insurance expense $50 and credit Prepaid Expenses $50.
5. Combine prepaid expenses if you have more than one
If you have more than one prepaid expense, you can combine them into one journal entry. Let’s say you have a subscription to Canva for $120/year. That’s $10/month. Then your journal entry would look like this:
Debit Insurance Expense $50
Debit Marketing & Advertising OR Software & Web Applications (whichever one you want to code Canva too) $50
Credit Prepaid Expenses $100
6. Reconcile
You know how we always have our friends’ backs? We’re going to do the same with our prepaid expenses! Regularly check that your prepaid expenses account matches what you’ve actually spent. If there’s a difference, no worries! Just adjust it, and you’re good to go.
7. Keep Those Receipts – It’s a Must!
Ladies, we know the importance of receipts – whether it’s for a refund or simply to keep track of our shopping. The same goes for prepaid expenses! Keep all the necessary documentation, like invoices and contracts, to back up your expenses like a boss.
Conclusion
Alright, fabulous ladies, we’ve conquered the world of prepaid expenses together! That wasn’t so hard, was it? You’ve got this! 💪🌟