do you sometimes need to pay for services before you actually get the service well if that's the
case then you should watch this video very carefully pre payments to vendors if you
have any questions about this topic you can leave them in the comment 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 when making a
prepayment to vendor the recommended method is called check to accounts payable method this is
the correct method of recording prepaid expenses with vendors with this method the vendor records
are perfectly accurate at each stage in the process the unpaid bills report reflects any
open transaction that has not been applied and the unpaid bills report is the most important report
and it is always accurate if you use this method the chart of accounts will be temporarily out of
sync with accounting theory until the service that you paid for is received once that happens
then your chart of accounts will be perfect and if you have to report your numbers before you receive
the service that you paid for there's a quick fix that we'll talk about later in the video so
how do you do the check to account payable method when pre paying for an expense to a vendor we use
the checks or expenses window we will put the accounts payable account in the category field
as the account that we will pay vendors balance is negative to reflect that they actually owe
us until the service is received from them the vendors and when the services received simply
enter the bill for the service on the day it was given the way we normally would when we enter a
bill and then the very last step is to apply the accounts payable check back from step one
to the bill that you entered into step four and everything will equal out perfectly for example
let's imagine on April 20 we paid a new vendor risa repair ranch to fix our equipment we paid
her with cheque number eight seven nine five four five hundred dollars she agreed to fix
our equipment before May 31 and will notify us when she is finished now what do we do here we
make a check to account payable so we click new and then we go over to vendor and then two rows
down we click either check or expense it doesn't really matter when you open it up you have to
put in a new vendor so you click add new this is called adding a vendor on the fly and it will work
with customers accounts and service items at the moment you make a transaction Risa's repair ranch
and you could always reopen the vendor permanent information to put in the rest of her information
later now this is on April 20 and of course it's not repair expense because we have not yet
incurred that expense she has not yet repaired the equipment so this check in the category
field is going to go to accounts payable accounts payable so we know that it's Risa specifically and
its account payable and the amount of the check will be five hundred dollars and of course we're
imagining will print it later and we could just as easily use the expense window for this very same
transaction we're paying this vendor from this bank account this amount of money but we're not
stating what the expense is because we have not yet incurred it the only thing we know is she will
OS the money until she delivers the service now when we click Save and close we can click reports
and then of course go to custom reports unpaid bills and now we have this new vendor up here
look at this Risa's repair shop the total is here one transaction and notice her balance is negative
her balance is negative because she owes us five hundred dollars worth of future service until she
actually repairs the equipment now let's imagine on April 21 Risa returned our repaired equipment
good as new she gave us a copy of the paid bill so what do we do we enter the bill normally even
though it's paid and apply the April 19th check to net the vendors balance so what should we do
so April 20 we click and we come over here to bill and we put the bill date April 21 and again still
2017 its Reese's repair ranch now this time the category is repair expense because we do have the
repair expense on the day that she actually gave the service and delivered the repaired equipment
and the amount is $500 because that's the value of the service that she gave us on April 21 when
she fixed the equipment so that's easy enough to record now we click Save & close and when we look
at Reese's repair ranch we see a positive 500 for the bill and a negative 500 for the check this is
when we incurred the expense and this is when we paid it what we should really see on the unpaid
bills report is zero for rhesus repair ranch and these two should be netted against each other we
learned in a prior video the only way to do that would be to make a zero dollar bill payment as of
April 21 so we click new and we go to bill payment and we choose the filter because we want to see
all dates and we want to only see rhesus repair ranch now what we're seeing here is the check
because the check is a positive number in the vendor balance the way a bill is so we're going to
click it but notice QuickBooks knows that there's five hundred dollars of credit available because
this check is being applied to this bill the five hundred dollar credit comes from the check so when
we click Oh be careful that the payment date is the same day that she physically delivered
the service April 21 don't forget it's 2017 in our little story so be very careful that we're
paying zero and using the five hundred dollar check that we gave to apply to the bill that
she gave us which was already paid click Save and close and now the unpaid bill report does not have
Reese's ranch at all because the two numbers are netted against each other and the two transactions
are no longer open now as I mentioned earlier if you need to report your financial statements after
paying for the service but before receiving the service or item you will need to make a
typical normal accounting adjustment usually a journal entry to move the negative balance
of any vendors accounts payable records into an account called prepaid expenses don't worry
your accountant will know how to do this if you need to stop at any point and report your numbers
you