Prepaid expenses are purchases you pay for in advance but don’t use right away. Common examples might be fertilizer or seed, especially if you purchase these early for seasonal discounts.

In accrual accounting, these expenses should be recognized when the product or service is used, not when paid. In cash accounting, you recognize these when paid. We generally recommend you keep your books open to both a cash and accrual-based system: most businesses file on a cash basis, but accrual basis can reveal important insights about your operation. Learn more here.

Ambrook supports proper handling of prepaid expenses using a combination of balance sheet adjustments, transactions and journal entries.

In cash accounting, expenses are recognized when the payment is made, regardless of when the product or service is used. This makes it easier! You can just tag the transaction into its appropriate expense category when it appears in your ledger.

This approach immediately shows the amount as an expense on your cash-basis Profit & Loss report. However, if you use the prepaid expense in a different period than when you purchased it, your profit and loss may not give you a full picture of your profitability because you'll receive income at a different time than when you incurred the expense.

You'll first need to create a balance account for "Prepaid assets". If you don't have one already, you can make one by going to Balances > New Account > Other Current Assets > Make a new account called "Prepaid assets".

Then, find the prepayment transaction on your ledger. You can tag this as an "Asset Adjustment" into the "Prepaid asset" account. If the transaction is not on your ledger, record it as a manual transaction.

Tagging it as an asset adjustment keeps it off your cash-basis P&L, since in accrual-based accounting these expenses should not be recognized until they are used.

If you’re tracking cash basis books for tax purposes, like most businesses, you’ll want the expense to show up when the cash is spent.

This will record the expense on your cash books. That way, it will still show up as an expense on your cash-basis P&L, but not your accrual-basis, since you made a cash-only journal entry.

When you use the prepaid product/service, record the expense on your accrual books.

This will:

You can do this all at once, or spread the expense across months if usage is gradual.