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Creating a Prepaid Expense Schedule

As a SaaS company you are likely to pay other companies that offer services on a subscription model. On the Accrual Basis, any subscription lasting more than one month should be amortized over the course of the subscription period.


This is where the prepaid expense schedule comes into play. Below you will find a detailed walkthrough of the following:

Inputting Your Subscription Invoice into QBO


The first step in amortizing your subscription invoice is inputting the vendor invoice into QBO.


The below invoice from ABC Company, Inc. is for a software application that will be used by your engineering team from August 1, 2021 through July 31, 2022.


In QBO you will add a Vendor from the Navigation Panel > Expenses > Vendor > New Vendor



Next, input the vendor information as seen on the invoice and click Save


Now search for the vendor


And create a new bill using the New Transaction dropdown


Since you will be amortizing the expense out of the Prepaid Expense asset account, you will want to make sure the bill Category is set to the Prepaid Expense account and click Save


To check if the invoice was added properly, you can run a balance sheet report


And look at the transaction detail for the Prepaid Expense account


Now that you have input the subscription invoice, you need to calculate the amount to amortize at the end of each month.


Calculating your Prepaid Expense using a Google Sheet


The first step is to add the invoice detail to the prepaid expense schedule. Adding as much detail as possible to the schedule will help you locate the actual invoice in QBO when you the time comes.


Additionally, for the journal entry upload, you will want to add the expense account in the Account column and the class name in the Class column. As mentioned earlier, ABC Company, Inc. is a software application that will be used by your engineering team.



The first calculation in the Google Sheet is in Column I - Daily Amount to determine the daily amount to amortize (Invoice Amount divided by the days between the Subscription End Date and the Subscription Start Date)

=D3/(H3-G3)



Since this is the Prepaid Expense schedule, the Additions column (Column J) represents the amount added to the prepaid expense account during August 2021. The formula below adds the invoice amount to Additions if the invoice month matches the corresponding month

=IF(EOMONTH($B3,0)=EOMONTH(J$1,0),$D3,0)



The last formula on the Prepaid Expense schedule is pretty involved but it calculates the expense to be taken each month based on the Subscription Start and End Dates as compared to the respective month


=IF(J3>0,DAYS(J$1,$G3))*$I3,IF(J$1<=$H3,DAY(EOMONTH(J$1,0))*$I3),IF(EOMONTH(J$1,0)=EOMONTH($H3,0),I3,0)))


Once you have input the invoice information into the prepaid expense schedule, and calculated the expense for the month, you can create a journal entry to record the expense in QBO.


Recording the subscription invoice expense in QBO


In order to give you and your company a full picture of your expenses, you should be recording the prepaid expenses on a monthly-basis. The first step in recording the expense is to create a new journal entry. Navigation Panel > New > Journal Entry



Next you will input the following:

  • Change the journal entry date to the end of the current month (in this case 8/31)

  • Debit the Software account and input Engineering as the class for the calculated amount on the Prepaid Schedule (Note: Description should match the vendor name)

  • Credit the Prepaid Expense asset for the same amount


Once that journal entry is Saved, you can review your work by looking at the Prepaid Expense account from the Balance Sheet report as well as the Software expense on the Profit and Loss report


On the Balance Sheet report you can see the balance in QBO ties to the balance on the Prepaid Expense Schedule ($9,175.82)


Similarly, you can see the expense on the Profit and Loss report ties to the expense amount on the Prepaid Expense Schedule ($824.18)


Conclusion

The steps, and the link to the Google Sheet, from above can help you amortize your prepaid expenses during your month-end close process. There are additional steps that can be taken to further automate this process and make prepaid expense entry mostly painless.


If you do not have the time or desire to create your own prepaid expense entries each month, feel free to reach out to me (phil@thesaasaccountant.com) and I will be happy to provide this service as well as many others.

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