How do you allocate prepaid expense to outstanding bill?

Hello, @ballie-thebear.

Let me share some information so you'd be able to track your prepaid expenses.

First, you'd want to create an account to track your prepaid expense. Here's how:

1. Go to the Accounting menu.
2. Select the Chart of Accounts tab.
3. Click the New button.
4. Choose the Account Type and Detail Type. 
5. Enter Prepaid Expense as its name.
6. Click Save and Close.

Once completed, record payments to the outstanding bill. Just make sure to use the prepaid expense in paying the bill. 

The next process is to create a memorized expense or bill transaction to allocate one month or a quarter of the expense. Each time an entry is created, it reduces the balance of the Prepaid expense account. The balance in the Prepaid Expenses account should be zero at the end of the coverage period.

Lastly, I'd recommend consulting your accountant. This way, you'd be guided accurately in setting up your prepaid expense account.

Leave your comments below if you have other questions about tracking your expense transactions. I'm just a few clicks away.

I created the prepaid insurance and it has $800 balance.  I need to pay the Jan bill for $400.   I pull up the bill I created, go to payment and chose Prepaid Expense as Bank/Credit Account and it says that I can't use that account type and will not let me pay the bill with it.

I'm here to help ensure you'll be able to pay your January bill using the prepaid account you created, kekoakat.

To ensure you can use the Prepaid Expenses as the Bank/Credit account when paying your January bill, you might want to double-check that the Account Type used is Bank or Credit Card.

The system will not allow you to pay the bills using the Other Current Assets Account Type. To edit your prepaid expense, here's how:

1. Click Accounting in the left panel and choose Chart of Accounts.
2. Locate the Prepaid Expense account.
3. From the Action drop-down, click Edit.
   
4. Under Account Type, choose Bank or Credit Card.
5. Hit Save and Close.
   

Once changed, go back to your bill and pay it. You can check this article to know what are other ways to record bill payments in QuickBooks Online: Enter bills and record bill payments in QuickBooks Online.

I recommend visiting this write-up: Account Management. These will provide your links about managing your QuickBooks Online account, income, expenses, inventory, and running reports.

Kindly update me on how things go by adding another comment below. I want to make sure you're able to pay your January bill using the Prepaid Expense account, and I'm here if you need further guidance. Have a great day! All the best.

Prepaid expenses should always be set up as  "current asset" accounts, not bank or credit card accounts.  A more accurate way to apply the prepaid funds to an invoice is to enter the invoice to your accounts payable as normal, then enter a credit from the same vendor for the same amount as the invoice and post it to the "Prepaid" account.  Then when you go into pay the invoice, simply apply the credit as the payment.  You can check the transaction by looking at your Prepaid account.  It should show the reduction in the asset by the amount of the credit that you applied to the invoice.