welcome to our second video regarding pre payments to vendors this method is what I call pay from
prepaid and I created this method a long time ago and it works perfectly and it gets you as close
as you can possibly get to having everything work perfectly there are different situations
and therefore there are different methods of recording prepaid expenses to vendors however
the pay from prepaid method is for any expense that you pay a vendor for in advance and again
it was invented by me Marx Mullin and it works perfectly if you listen carefully and follow
the steps the pay from prepaid method has as its priority the trial balance and chart of accounts
being correct it means that if you use this method at any given moment all your accounts in
your general ledger will have the correct balance it's also true that the vendor will have a record
of every single event where you paid in advance and receive the service the only negative thing
is that in the vendor records even though you will have a list of every event every payment
to the vendor and every moment that you receive the service but unfortunately this method won't
give you a running balance of what the vendor owes you from what you prepaid however there
is a way to work around this and I'm going to give you a bonus video after this one to show
you just a few simple steps so that you can get the running balance of the vendor and still use
this method to set up for this method you have to create a bank type of account called prepaid
expense now this is something called a workaround it means we're not using QuickBooks exactly the
way we're supposed to but by using QuickBooks in this way it will give us everything we need as
simply as possible in our example the prepaid account will be prepaid cleaning expense for
example let's imagine on May 17th we paid Dan's cleaning one of our vendors $500 in advance for
three future cleaning engagements and we paid Dan on May 17th with cheque number 161 now at
the moment that you pay for anything cash in the bank goes down however in this case your general
ledger will be correct and prepaid cleaning expense will go up at the moment that you
pay let's take a look at how to record it from the main menu click banking write a check now the date
that you actually paid Dan was May 17th the money amount was 500 and the check number was 161 now
the person or the vendor whom you paid was Dan's cleaning and the money is going from your cash
and bank account to this account prepaid cleaning expense this is a bank type of account that I put
in the chart of accounts before I made the video right now prepaid cleaning expenses zero but after
we click Save and close you can look at the trial balance and see the prepaid cleaning expense shows
up for the first time as five hundred dollars now the interesting part comes when we actually
receive the service from Dan's cleaning on May 18 we received the first cleaning service two
hundred dollars worth of cleaning and he gave us a paid bill to acknowledge the event of the service
now in order to record this we will use the Ryder checks endo remember it's a workaround that's the
reason why we're using a window that you wouldn't think we would normally use but it will work out
perfectly on the top of the window select the pay from prepaid account as the account you're paying
from and at the bottom of the window select the actual expense of the service you received let's
take a look at how we would record this from the main menu click banking write a check now on the
top you want to choose prepaid cleaning expense which is the bank type of account that we added
for this situation so the money is coming from the prepaid account and it's going to the actual
cleaning expense account the bill number is what occupies the cheque number field because that's
the transaction number 8 7 8 7 6 so we could even put bill number 8 7 8 7 6 the date of course was
May 18th the vendor was Dan's cleaning service and the money amount of the service we would
received the value of the service we received against our $500 deposit is $200 so again the
top is prepaid cleaning the bottom is cleaning expense the money amount is the amount of service
we received on the 18th and the bill number goes here now when we click Save and close we can look
at the trial balance and see prepaid cleaning expense has properly decreased to it's balance
of 300 because that's the remaining amount of service that we will receive in the future you
will also notice that cleaning expense now shows up for the first time as $200 because that's the
amount that we actually used now when we look at the vendor records the proper report to show the
vendor records properly when it comes to prepaid is transaction list by vendor transaction list
by vendor now we push a for all and we scroll down to Dan's cleaning service and you can see
this does keep very accurate records of Dan's cleaning service and the transactions we have
notice that the check on May 17th for five hundred dollars means Dan owes us 507 directors if you use
transaction list by vendor and you can see it's also in chronological order so you do have most
of what you need if you use this method the only thing you don't have is the running balance now
you may have to export this report to excel if you really really need the running balance
it would be just three simple clicks to export this report to excel and i'm going to give you
a bonus video which is just a few minutes that will explain how to use excel to get the running
balance meaning the balance of the that the vendor owes you for the prepaid at any given moment in
time it's very rare that people need this and need this in a report but if you do I'm going
to make a very simple video that's only a couple of minutes long that will show you step-by-step
what you must do in Excel to take the quickbooks report the transaction list by vendor and make it
into a running balance so you know specifically what that vendor owes you at any given moment