does your law firm sometimes pay in advance for items or services that they use to service clients
well then you need to know how to allocate client costs and prepaid expenses
if you have any questions about this topic you can leave them in the comments section below and
i'll do my best to help you and of course if you feel the video helped you i hope you will click
like and don't forget to subscribe to get updates on new videos that come out all the time we don't
always know which clients will need the resources that we pay for and record as expenses this is
the case if we pay client related expenses before using them at the moment we pay we don't yet know
which client the service or asset will be used for we will know how much of each prepaid resource
is used for a particular client only at the moment the item is actually used
and unfortunately most states require that you apportion or allocate even the prepaid costs
to your clients for what was used some examples of prepaid costs and job expenses would be paying
a car service in advance for a set number of rides that you will use to go to or service your clients
paying rent several months in advance of actually staying in an office or someplace that you rent
paying an insurance policy up front before the coverage starts is also an example of a prepaid
cost or expense or prepaying a repair service contract with a tech company who promises to
come in the future after the payment and fix your computers as needed so these are typical
prepaid expenses that you would have to apportion to clients now all prepaid services and resources
are current assets at the moment we purchase them they become expenses at the moment that we use
them and when we use them we record a transaction in the right checks window and that's a workaround
that only attorneys have to use in quickbooks desktop to move the item from asset to expense
for whatever was used for that particular client for example at the moment you pay for anything
you have an asset and then as you use the value the amount you use goes from asset to expense
so if you purchase supplies in advance at the moment you purchase the supplies you have an asset
then over time as you use the supplies the amount of supplies you use becomes
supplies expense and the asset value is decreased by the amount that you used
same thing with prepaid insurance when you pay the policy up front you have an asset
then as time goes by you have to adjust for the amount of the policy you used over time
and the amount of the policy that you used over time becomes insurance expense same thing if you
pay your rent in advance on the office as you stay in the office the asset that you paid for
for the value of staying in the uh apartment or office gets used over time as you stay
and the amount that you used and actually stayed for becomes rent expense now in our example we're
imagining that on march 25th we paid staples three hundred dollars with check number three
for office supplies we do not yet know which clients these expenses will be applied to
let's record this purchase into the current asset called supplies okay but now here's the thing
in quickbooks desktop we have to do a work around to handle these prepaid expenses
so we're not going to make it current asset type we're going to make all of our prepaid expenses
a bank type of account it's still a current asset but by making it specifically a bank type of
account instead of a general current asset we will have the ability to make a separate transaction
at the moment we use the service or the value so this technique allows us to do this very smoothly
in quickbooks desktop so we click banking write a check and we put the date march 25th of 2021
and we're purchasing it from i guess
staples so if staples is not on the list you can very easily click add new vendor
okay and it's three hundred dollars and it's a current asset called supplies
but when we add it to our chart of accounts we're going to do the work around and make it a
bank type of account it's still a current asset listed in the same places
but it gives us the ability to do the work around and bill the client for specific supplies that we
will use in the future save and close and then of course save and close your
check window and then when you open your trial balance you can see that it's in the
position of a current asset on the debit side three hundred dollars for supplies
now when we continue in the same example let's imagine on april 2nd an associate lawyer used
fifty dollars of these supplies that we purchased on march 25th and we used it for client betty boop
what will be the result in the trial balance at the moment we use 50 of these supplies
well supplies the asset is going down because we have less of the value of supplies
if we used some and supplies expense which is the amount we actually expended
will increase in our chart of accounts because we now have an expense for the value that we used
so what will be the result supplies will become 250 you see right now it's 300 but it will become
250 because we just use 50 dollars of supplies and at the moment we use these supplies supplies
expense will show up in the trial balance for fifty dollars let's go ahead and record the fact
that we use this on april 2nd for betty boop we again click banking write a check we make the date
april 2nd but now here's the workaround the value is coming from the supplies account and it's going
to supplies expense and if you don't have supplies expense on your list you would have to click add
new expense and type in supplies expense i happen to already have it as an expense type of account
representing what we used now we don't put a payee because there is no payee we
put the money amount of the supplies that was actually used on april 2nd and most importantly
we have to put which particular client the supplies were used for that gives us the ability
to apportion this after we purchased it so when we click save and close and we come back
to the trial balance you can see the numbers are exactly as what we expected the supplies
went down to 250 and the supplies expense showed up for the first time as fifty dollars
now the most important report to check after you do this is the profit and loss by job
so if we click profit and loss by client we can see that this specific fifty dollars of
supplies expense is only in the column of betty we needed to use fifty dollars of supplies for betty
lowering our profit for betty boop the client by fifty dollars now let's do a second example let's
imagine on april 6 we purchased 200 of stamps from the united states post office we paid with cash
from the chase bank debit card and they gave us receipt number one two three four five six seven
that we taped on the box to specifically identify which purchase the stamps came from
so what will be the result in the trial balance at the moment we pay in advance for this postage well
the asset called prepaid postage would increase because it shows up for the first time because we
just purchased a current asset because we paid in advance and we don't yet know which clients
the stamps will be used for and of course the bank account will decrease by the two hundred dollars
because we just bought stamps and paid the money but don't forget our attorney workaround in
quickbooks desktop when we buy this prepaid asset we have to make it specifically a bank type of
account so our work around will work smoothly and will be able to apply it to a future client's job
from the main menu we click banking write a check the date is april 6. make sure you're paying from
the correct operating bank account and we're paying the united states post office two hundred
dollars now we're paying for prepaid postage so we come down here and because it's not on the list we
click add new and don't forget the work around we make the prepaid expenses a bank type of account
and we click save and close so we're paying in advance two hundred dollars for postage
that we will use for a future client so we can click
save and close and when we open the trial balance you can see the bank account decreased by the two
hundred dollars and the prepaid postage showed up for the first time as two hundred dollars
now let's continue the example and imagine on april 7th an office administrator
used 25 dollars of the stamps purchased on march 7th with that receipt number
for things they needed to service this specific client candy charles so what will be the result
in the trial balance when we now use twenty five dollars worth of the stamps well the
prepaid postage will go down by the amount that we used because that asset is no longer worth 200
because we just used 25 dollars worth and postage expense will show up for the first time in the
amount that we used and what will happen is that this prepaid postage will become 175 dollars and
postage expense will show up in the trial balance for the very first time as twenty five dollars
so this is how we will record using the prepaid postage we click banking write a check and we put
the proper date that we actually used it but the money is coming from prepaid postage and the money
is going to uh postage expense if you don't have postage expense on the list you'll have to add
it and make it an expense type of an account now the amount that we used was twenty five dollars
there's no payee when you use an item but you must identify the specific client that you applied the
postage to and in this case it's candy charles now we don't want it billable we'll learn how to build
the client for these prepaid expenses later by just clicking the check mark when we learn more
about billables but right now don't let it click the check mark we just want to click save and
close so that when we look at our trial balance we can see the result is exactly as what we need
prepaid postage is now the amount that reflects the value that's on hand
and postage expense only reflects what we actually used but the most important thing to look at
is the profit and loss by client you can see that this twenty five dollars
of postage expense that we used is only in the column of candy charles so that's the
work around the method and the technique of applying prepaid costs to future clients jobs
now let's close this out by using the remaining supplies and postage let's imagine also on april
7th we use 250 of supplies and 200 of postage for an office party not related to any specific client
and what will happen after these two transactions well both the pr the prepaid postage will go down
to zero and it will all go into postage expense and the supplies will go down to zero because we
used all of them and they will all go to supplies expense and the irs doesn't need to know that it
was for a party but we need to know that it's not for any specific client so that should be easy
banking write a check we make the date is already april 7th the prepaid postage the remaining amount
of prepaid postage is 175 dollars and we're not going to put party as the payee but we will put
postage expense but we will not put a customer or client we will simply click save and close
and you can see in the trial balance that prepaid postage is wiped out and it all became the expense
banking write a check same thing supplies the balance of supplies
is 250 it all becomes supplies expense so we click save and close and you can see
the results in the trial balance are exactly as what we expected
our supplies and prepaid postage are zero and the total amounts are now expenses but most
importantly you can see that it is proper that they have not been tracked to any specific client
you