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Senior Explorer **

setting up liabilities

Hi, I have probably done this the wrong way but here goes:

 

I have created a liability account for say £1,900 (this is the total amount for motor insurance), I opened this account with a journal entry (thinking now is this wrong?)

 

I have then created a direct debit that is paying off the the liability monthly but it is not going down as an expense to the insurance category due to the way I have set it up.

 

What would be the best way to set this kind of liabilities up?

 

Paul

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Best answer 03-25-2019

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Established Community Backer ***

Re: setting up liabilities


@Sharky91 wrote:

Hi, I have probably done this the wrong way but here goes:

 

I have created a liability account for say £1,900 (this is the total amount for motor insurance), I opened this account with a journal entry (thinking now is this wrong?)

 

I have then created a direct debit that is paying off the the liability monthly but it is not going down as an expense to the insurance category due to the way I have set it up.

 

What would be the best way to set this kind of liabilities up?

 

Paul


It depends, first delete the journal entry to get back to start

 

If you paid the full amount and want to expense that over the annual time period, that is not a liability, it is an asset account called prepaid ins.  Then you schedule a payment monthly

 

If you are paying monthly when you get a bill from the insurance company, the best thing is just make the company a vendor, and pay the bill when needed using the insurance expense account as the expense (reason) for the payment.  You can schedule a recurring payment in QB if you want.

 

I know it seems like there should be a liability since there is an amount due in real life, but it just doesn't work like that in accounting.  Liability accounts are used when you actually borrow money for something and have to pay it back.  In the case of insurance you have not borrowed anything, if you stop paying, the insurance stops too.

 

Journal entries should be the exception when using QB, they often do not work as you think they should, and  when you use inventory type items they never work for inventory. It is much better to use the forms on the home page the way QB is designed to be used.    Journal entries also bypass accrual/cash reporting, and will not show on many reports.

View solution in original post

3 REPLIES 3
Established Community Backer ***

Re: setting up liabilities


@Sharky91 wrote:

Hi, I have probably done this the wrong way but here goes:

 

I have created a liability account for say £1,900 (this is the total amount for motor insurance), I opened this account with a journal entry (thinking now is this wrong?)

 

I have then created a direct debit that is paying off the the liability monthly but it is not going down as an expense to the insurance category due to the way I have set it up.

 

What would be the best way to set this kind of liabilities up?

 

Paul


It depends, first delete the journal entry to get back to start

 

If you paid the full amount and want to expense that over the annual time period, that is not a liability, it is an asset account called prepaid ins.  Then you schedule a payment monthly

 

If you are paying monthly when you get a bill from the insurance company, the best thing is just make the company a vendor, and pay the bill when needed using the insurance expense account as the expense (reason) for the payment.  You can schedule a recurring payment in QB if you want.

 

I know it seems like there should be a liability since there is an amount due in real life, but it just doesn't work like that in accounting.  Liability accounts are used when you actually borrow money for something and have to pay it back.  In the case of insurance you have not borrowed anything, if you stop paying, the insurance stops too.

 

Journal entries should be the exception when using QB, they often do not work as you think they should, and  when you use inventory type items they never work for inventory. It is much better to use the forms on the home page the way QB is designed to be used.    Journal entries also bypass accrual/cash reporting, and will not show on many reports.

View solution in original post

Senior Explorer **

Re: setting up liabilities

That makes sense to me now, thanks.

Established Community Backer ***

Re: setting up liabilities

You're Welcome