How To Track Prepaid Inventory in Quickbooks Online

How to handle prepaid inventory in QuickBooks? This question has a big problem for small business users because it’s important to manage workflow.

First, we explain What is prepaid Inventory? Because most users don’t know about it. Your small business must record the cost of the inventory as an expense on the income statement you sell it and prepaid inventory is inventory for which you have paid but have not yet received.

How To Handle Prepaid Inventory?

On hand report as well as the profit and loss reports are accurate by this workflow to manage properly, because its important.

We share an example with you,  Assume your small business paid $2000, including shipping, to a supplier before the supplier delivers your inventory and you assume sell the inventory the following quarter. When you pay for the inventory, record $2000 as prepaid inventory in the current assets section of your balance sheet.

Remove $2000 from the prepaid inventory account, when the inventory arrives and add it to the inventory account. The following quarter, remove $2000 from the inventory account and report $2000 as a cost of goods sold on your income statement to expenses the inventory.

What is the purchase order?

First, we describe what is a purchase order? and why is important? Before to track inventory it is compulsory to know about PO (purchase order).

A purchase order is a document sent by a purchaser to a vendor that authorizes a purchase and this is an official confirmation of an order.
It contains:

  • Price
  • Mailing address
  • Payment Information
  • Invoices address
  • Purchase order number

When we work on Purchase order one question arises in your mind why do companies use the purchase order? Here is some reason for your question:

  • They set clear expectations
  • They help manage orders
  • Also, they help with budgeting
  • They are the key part of audit trails
  • They are legally binding

Steps To To Track your Inventory:

If you do not want to see credit in the account or when you want to separate prepaid inventory from the inventory asset account, the following steps work well.

Step 1: Create a Purchase Order (PO) when the order is placed.

  1. Go to the + New, and click on it.
  2. Click on the Purchase Order.
  3. Now, you need to enter all the appropriate fields.
  4. Click on the Item details section, then insert all the details of the product/service you are purchasing.
  5. Next click on the Save.

Step 2: Write a cheque to the supplier then categorize the payment under a prepaid inventory account.

  1. Go to the + New, and click on it.
  2. Click on the Check.
  3. Now, go to the supplier.
  4. Under this Category details section, click on another current account like Prepaid Inventory then insert all the amount of your payment.
  5. Click on the Save.

Step 3: When the inventory is physically received, you can roll the PO to a bill for that supplier.

  1. Go to the + New, and click on it.
  2. Click on the Bill.
  3. Later, click on the name of the supplier.
    Note: When you choose the supplier, then the open purchase orders for that supplier will display on your screen at the right side.
  4. Now, find the purchase order you created and later click on the Add Purchase Order.
  5. Click on the Save and close.

Step 4: On the previously written cheque, re-categorize the payment to Accounts Payable, which will create a credit for the Supplier.

  1. Go to the Cheque screen and change the Account to Accounts Payable (A/P) in the drop-down.
  2. Click on the Save and close.

Step 5: Finally, show the bill you created for your supplier as paid.

  1. Go to the + New, and click on it.
  2. Click on the Check.
  3. Later go to the supplier from the drop-down list.
  4. Now, you need to add the bill and the cheque you entered for the supplier.
  5. Click on Save and close.
  6. Note: After adding, the bill appears under “Outstanding Transactions,” and the cheque under “Credits.”

Tip: There is also another way to create a Purchase Order when the order is placed, insert a bill payment check, then set credit for the supplier. When your items are received then you have to convert the PO to a bill then apply the previous bill payment to the bill.

Hope, this article will be helpful to you to track prepaid inventory in QuickBooks Online, but if you still need any technical assistance then feel free to contact us dialing our toll-free+1-855-441-4417 and get quick help from our expert team of ProAdvisors.

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