Categorizing Prepaids
Alpacamom
Member Posts: 4
I am new to the Wave software so not sure where to be in asking questions about transactions, or the software so hope someone can help me. I have a couple questions.
I have 2 non-profit organizations, that I do accounting for, both have prepaid expenses and income that are for events in the following year. How and where would I categorize them? I know I would have to transfer them into the income/expense accounts on Jan 1 of each year. My guess is a prepaid account but not sure. I also need to record a Prepaid deposit that really just transfers to the next years event by the facility. Easier on both of us, just don't know how to record it as an asset. I haven't found where we can do journal entries, is that possible.
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@Alpacamom,
Prepaid expenses and prepaid revenue are items that are accounted for using journal entries. A short term asset and short term liability need to be created for each. A typical prepaid expense is insurance. Let's go through insurance as an example, The entity pays 1200 for insurance on 6/29/20. Coverage is for 6/30/20 to 6/29/2021. On your transaction journal you would see the entire 1200. This should be categorized as prepaid insurance. Every month you would make a journal entry to record insurance expense. The entry would be Debit insurance expense and credit prepaid insurance. Based on the above you would have 100 per month (1200/12). At the end of the year you would expect the balance of prepaid to be 600.
Prepaid expenses and revenue are accrual method accounting concepts.
Thank you Mikeg. That part I get but these are prepayments for expenses for the following year or prepayments, or income, from customers for the following year for an event. The organization does not want them showing in their income statements for the current year. That is one scenario. The other organization has paid for deposits to keep the same date of their event every year. One I paid for so the the credit would be cash the debit would be prepaid deposits. My problem here is that there is a deposit with the event facility, before I started doing the accounting, that I need to book. How do you book the credit side of that. Debit is Prepaid deposits, Credit is ??
To post revenue that is deferred to the next period, you would create a short term liability "Deferred Revenue". So the deposit shown in green on the transaction journal would be coded to Deferred Revenue. Deposits received for a future event are not an asset but a liability. You have unearned revenue, an obligation to perform something in the future. As an example, the entity receives 1000 as a deposit for an event in 2021. They also prepay a DJ 400 for the event. You would expect to see on the transaction journal 1000 in green and 400 in black. The 1000 would be categorized as deferred revenue (short term liability) and the 400 as prepaid expenses (short term asset). Keep in mind this is accrual based accounting and not cash based accounting. Hope that helps.
@Mikeg Awesome response Mike! Thanks a lot for explaining so well.
@Mikeg this is interesting but not my example. I pay a distribution (from my LLC to one of two owner partners) at the end of the year but the payment doesnt get processed till January. I want to accrue the transaction so that my books are clean (distributions must match ownership percentages). I have used Short Term Liability to treat the accrual but am not clear how to treat the actual transaction that occurs in January. I note that the Short Term Liability transaction is slightly different to a regular distribution transaction which suggests there is a different way to treat the actual payment in January.
Any help here?
@maleach55,
You would not accrue a distribution. One it has no effect on the income statement. Most importantly though, you would be reporting distributions and reducing tax basis of the capital account for an amount not received. Accruing distributions and dividends is acceptable for audited financial statements but not for tax purposes. I would not recommend.
@maleach55,
I understand, but it is okay for partners not to have equal capital accounts. This can happen for various reasons including distributions. Partnerships present distributions on a cash basis. Refer to the instructions of Form 1065 Sch K and line 19A of the K-1. Accrual of a distribution is not allowed for tax purposes i.e. the K-1.