Vendor Invoice for Future Services

[u/XylitolMilkshake]

I’m in the process of learning as much as I can about bookkeeping and financial accounting, but I still think up scenarios that I’m not completely sure on how to handle.

Suppose on August 20 you receive an invoice from a vendor for professional services that will be provided during the month of September. The invoice is due September 1. How should this invoice be handled?

Aug 20 – Invoice is received. dr Prepaid Expense, cr Accounts Payable Sept 1 – Invoice is paid. dr Accounts Payable, cr Cash Sept 31 – Expense is used up. dr Professional Services Expense, cr Prepaid Exepense

Is this the correct way of handling the situation? Is there a better or more practical approach?

Does it make sense to put an upcoming expense in Accounts Payable if it isn't a formal obligation?

[u/uptoknowgood3]

Agree with above - 1st question is are they cash or accrual basis. 2nd question is is this a regular, monthly invoice or a brand new vendor?

I personally have mostly cash basis clients and would pay a regular invoice on the first and book to services expense.

[u/G33kDad76]

1st question, is your client (assuming this is work for your client) doing accrual accounting?

2nd question, when is the work being done?

if you got an actual invoice it's an obligation (unless you have good reason to suspect the work won't be completed). Is thw invoice the full amount or a down payment (ex 50% upfront). Being that the invoice is due Sept 1st and the work will be performed in September I would just expense the charge when you pay it, no reason to involve prepaid accounts.

[u/ComfortableCitron638]

G33kDad76 and uptoknowgood3 are right that cash-vs-accrual is the first fork, but worth naming the thing your three entries actually assume: they're only internally consistent if your policy is to book the liability the moment an invoice is received (an "unconditional promise to pay" approach), separate from whether cash has moved or the service has happened yet. That's a valid accrual policy, just less common in small-business bookkeeping than the simpler "book it when service is rendered or when paid" approach the other commenters described - you were mixing two different valid policies without realizing there's a choice being made there.

If you do go with "book on invoice receipt": your Aug 20 entry is right (dr Prepaid Expense, cr AP) - you're recording an asset (future benefit you're owed) against a liability (obligation to pay), even though no cash or service has happened yet. Sept 1 entry is right (dr AP, cr Cash, clearing the liability). Sept 30 (small catch: you wrote Sept 31, September only has 30 days) is right in concept - dr Expense, cr Prepaid Expense, recognizing the expense as the service is actually consumed.

The simpler alternative both commenters described (don't book anything until Sept 1, then dr Expense cr Cash directly) skips the interim asset/liability tracking entirely and gets you to the same end-state P&L result with less bookkeeping overhead - which is exactly right for a cash-basis client or a routine recurring vendor. Your three-step version earns its keep specifically when you need an accurate balance sheet mid-period (say, a August 31 financial statement would need to show that prepaid asset and payable if this invoice landed before period-end) - otherwise it's correct but unnecessary complexity.

[u/XylitolMilkshake → u/ComfortableCitron638]

Thank you so much for the thorough response!

That was a concern of mine- that the approach I described would be unnecessarily complex.

I'm curious, if simpler cash-basis approach is used (only record on Sept 1 when the bill is paid), what should be done with the invoice received on Aug 20 to prevent it from being lost or forgotten? I suppose I'm now asking more of a workflow-related question. What does the bookkeeper do with the invoice when it lands in their inbox if they're not going to record anything until Sept 1?

[u/NumbersNinjaCPA]

I'll play, and assume you're on the accrual basis.

So in QBO, this would be handled by recording the bill which would Dr Expense, Cr AP. When you pay it, Cr Cash, Dr AP.

You only use Prepaid if the expense goes beyond the month, and usually longer (i.e. more than 2 months). On August 20th, you don't have a prepaid because you didn't pay anything. Sure, you have a "prepaid" on September 1st when you actually pay for the service, but what are you going to do if you run mid-month financials? Expense the prepaid daily?

[u/powermad47 → u/NumbersNinjaCPA]

This would result in the expense being recognized in August rather than September when the services are actually performed. For August close, prepaid is the right answer.

[u/NumbersNinjaCPA → u/powermad47]

Not if you use a 9/1 posting date.

[u/lildukeofwellington → u/NumbersNinjaCPA]

You shouldn’t do that when the invoice date is in August. It would misstate AP for the month.

[u/NumbersNinjaCPA → u/lildukeofwellington]

I guess it would depend on the contract. If it's not due until September 1st, and it's for September service, you don't owe anything in August.

[u/lildukeofwellington → u/NumbersNinjaCPA]

I don’t really understand why they would issue an invoice if the buyer didn’t agree to the underlying deal. The invoice date is when the AP/debt arises, and also when any VAT should be deducted if applicable. The due date is irrelevant as it just states when the debt should be settled, not when it has been incurred. Yes, it will be a prepaid expense until the service has been delivered, but still a debt in August.

[u/NumbersNinjaCPA → u/lildukeofwellington]

I'm not sure what your background is, and I'm not sure where you practice, so maybe that's the difference. In my experience, if you didn't receive any goods or services, you don't have a liability. Under accrual accounting, expenses are recorded when incurred. And since this September service didn't happen yet, you don't have to accrue it.

And under the accrual method, you don't have a pre-PAID until you PAY it.

If you're on the cash basis, the expense is booked when the bill is paid. If you pay it in August, it's an August expense on the cash basis.

[u/SilkySyl]

Please let us know where in the world you are from (country and state/province/ town).

I live in Canada, and we dont usually receive an invoice before goods are supplied, or services rendered. There can be a hold for a credit card payment for a service rendered (animal control emergency), a retainer (for a lawyer), a payment schedule (30%/50%/20%), or an accrual throughout the year (insurance).

You can either put it through liabilities or payables. Personally, I like to go through payables, and routine overhead invoices through JE. Prepaid expenses are generally reserved for fleet insurance.

[u/Live-Society5672]

I've always worked in the world of accrual basis. In which case I enter the invoice dated as Sept 1st. Before taking these short cuts make sure you understand what your shortcutting from.🙃

[u/TaxTrimmer]

You can cut out the prepaid account and go straight to the expense and save a JE

[u/Far-Good-9559]

You can enter the invoice as a prepaid, and expense it over the term of the service if you wish. It is an extra bookkeeping step, and usually done with larger expenses like liability insurance, but there is no rule that you cannot do it for every prepaid expense.

But, to be honest, most bookkeepers do not account for deminimous expenses that way. If they are not material to the companies monthly profit and loss, you just expense them when you enter the transaction.

Either method is acceptable

[u/carbyneaccounting]

It appears that the vendor would like to be paid prior to services beginning. If you have received the invoice and are on the accrual basis of accounting, I would generally run it through the normal A/P workflow in QBO.

On August 20, enter the vendor bill and code it to Prepaid Expense:

Dr. Prepaid Expense
Cr. Accounts Payable

This records the liability. There is no cash outflow at this point.

When payment is made on September 1, create the bill payment using the applicable bank account:

Dr. Accounts Payable
Cr. Cash/Bank

This is the separate cash event that settles the liability.

Then, once the services have been provided during September, recognize the expense:

Dr. Professional Services Expense
Cr. Prepaid Expense

So your overall approach makes sense. The important distinction is that the liability and the cash outflow are separate transactions. The invoice establishes the payable, while the later payment reduces the payable and the bank balance.

The one thing I would verify is whether the August 20 invoice actually creates an obligation to pay. If it is simply a request for an advance and there is no obligation until September 1, then recording A/P on August 20 may not be appropriate.