Most churches use a cash basis of accounting and don’t need to be concerned about prepaid expenses. For a cash basis church, the expense is recorded when the cash is paid out. But for churches using an accrual basis, expenses need to be recorded when incurred regardless of when it is paid.
In the video, I walk you through an example of how I do this in QuickBooks Online. The biggest key…after you record the payment as a Prepaid Expense, immediately record the journal entries posted to future dates to convert the Prepaid Expense into an Expense.
Prepaid Examples
These are the ones that are most typical for a church to record. I’m assuming a calendar year fiscal year. I’m also assuming that you care more about expenses being recorded in the proper year instead of necessarily the exact month.
- Property/Liability/Auto Insurance: A lot of times you get a discount if you pay the annual amount instead of paying monthly. Rarely is this annual payment due on January 1. Imagine your premium is $12,000 for October through September. If the full amount is paid on October 1, $3,000 would be recorded to Insurance Expenses and $9,000 to Prepaid Expense. A journal entry would be recorded on January 1 to credit Prepaid Expense for $9,000 and debit Insurance Expense for $9,000. If you like being really accurate, you can split up the expense to be recorded each month.
- Down Payments: If the down payment is refundable, this should be recorded as a Prepaid Expense. Imagine your church needs to make a $500 down payment in December to reserve the movie theater for a youth event in February. Record the $500 payment as a Prepaid Expense in December. A journal entry recorded in February would convert the $500 Prepaid Expense into Youth Events Expense.
- Travel or Event Tickets: This is a common exception to the rule as they are usually not refundable. Instead people purchase trip insurance for plane tickets, and they usually try to resell tickets for games or concerts if they aren’t able to attend. The tickets should be expensed when purchased. Imagine in November the church buys plane tickets for a staff training event to be held in March for $1,800. The $1,800 would be recorded as Travel Expense or Training Expense.
- Advertising: This would be similarly recorded as insurance. If a church buys advertising, usually it is for a certain number of future months. Imagine a church pays $2,100 for a billboard for three months (November – January). When the payment is made, $1,400 would be recorded as Advertising Expense and $700 as Prepaid Expense. A journal entry would then be recorded in January to credit Prepaid Expense for $700 and debit Advertising Expense for $700.