Expenses paid but not invoice by fiscal year end

@sward123 ,

First, let's make sure these are prepaid expenses... sometimes called a deposit.  Was the work that you paid upfront for completed, or is it still to be done?  For example, if you gave a 1/3 deposit to a subcontractor for a concrete slab to be poured on December 20, and because of the holidays plus horrible weather, none of the work had been completed by Dec 31, that prepaid/deposit amount belongs on the balance sheet, as an asset, not the income statement. 

In other words, the term "prepaid" is connected to whether the work/product by a vendor is still owed to you, not the point at which you can bill your customer.

Hello there, @sward123!

Let me help share information about how you can enter upfront expenses for your customers in QuickBooks Online.

@KimMcCPA is correct.  You'll have to create a liability account and an item to be used to track the advanced expenses made. Let me show you how.

Creating a liability account:

1. Go to the Gear icon.
2. Under LISTS, select Chart of Accounts.
3. Select New.
4. On the Account Type ▼ drop-down menu, select Other Current Liabilities.
5. Below the Detail Type ▼ drop-down menu, Trust Accounts - Liabilities.
6. Enter a name for the account (say Trust Liabilities) or accept the suggested name.
7. Select an option from the When do you want to start tracking your finances from the is account in QuickBooks? dropdown list.
8. Click Save and close.

Once done, proceed with the remaining steps you need to take which are outlined in this article: How to Record a Retainer or Deposit in QuickBooks Online?

I also recommend contacting your accountant for guidance in tracking these paid expenses. They can also share the best accounting practice to follow considering the needs of your business in closing your books.

Use this link if you haven't found someone you can work with: QuickBooks Certified ProAdvisor.

I've included this reference that'll help you understand your account and its transaction history which breaks down how much money you have or owe: The Chart of Accounts in QuickBooks.

Let me know in the comments below using the Reply button if you've got questions other than recording upfront entries. I'll be here ready to lead a helping hand.

@JonpriL ,

Prepaid expenses are assets.

We are not receiving the deposit we are paying the deposit.  The steps you provided and the link seem to be dealing with receiving a deposit.

I would say we are paying a deposit on work yet to be performed.  

Example:  We supply a dumpster for a customer.  We subcontract a company to deliver said dumpster.  

The delivery company requires we pay up front for the delivery and pickup costs.  We cannot invoice our customer for the delivery or pickup costs until the project is complete.  

We paid a deposit to the subcontractor in 2021 but we will not invoice the customer until 2022.  I know the costs should match up with the revenue but this is a new process for us so I want to get it right.  

@sward123 ,

Using the dumpster example, if you pay $500 per month for the dumpster to remain on site for 4 months and $1000 for pickup of debris and removal of dumpster in the 5th month, beginning in December:

December's entry:

Prepaid expense       2,500

Debris removal             500

Checking                                    3,000

January - March entry

Debris removal             500

Prepaid expense                           500

April entry

Debris removal            1000

Prepaid expense                          1000

Prepaid expenses represent what your vendor owes you, in this case, the obligation to leave a dumpster at your site until April.  The decision to not invoice the customer until the end of the project is a separate issue and may be something you want to revisit in the future... if the hit to cash is a pain point, and if your own CPA/tax preparer determines that income should be recognized as work progresses, even before it is billed (more accrual basis accounting).

@KimMcCPA @sward123 

Correct me if I'm wrong but, under the IRS's "12-month rule", there's no need to capitalize this expense (create a prepaid expense asset on the balance sheet).  It can be fully expensed when paid in 2021.  Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create benefits for the taxpayer that do not extend beyond the earlier of: 1) 12 months after the right or benefit begins or 2) The end of the tax year after the tax year in which the payment is made (2022).     

If you need to create GAAP-compliant financial statements (you most likely don't), then capitalizing is correct, but for tax accounting, you can deduct it fully in 2021. 

@Rainflurry 

What an excellent comment!  Exactly why @sward123 and everyone else using this forum should bring any info obtained here to their own trusted CPA/tax pro.  There's no way to discern the type of compliance that these business owners must answer to when they pose a question here.  Most of the time, we aren't even told the type of business entity, only the Intuit product they're working with.  I was trying to start with the very basics, to determine if an upfront payment could be considered a prepaid expense because the business owner seemed to be wanting to consider it that way.  If it's not required, but it's also not prohibited, there's your gray area, and where the business owner has a choice.