Applying Prepaid Expenses to a Client's Invoice

Note: the yellow highlighted text has been added since you last viewed this page.

When would this process be used? Let's look at several scenarios. This process applies to scenarios 3 and 4.

1. You supply all the materials and supplies, and charge the client directly for them.
2. The client supplies some or all of the materials.
3. The client has an agreement with you that he will purchase or pay for the supplies or services. For whatever reason he wants the supplies to be included on your invoice as part of the job and to be handled through your bookkeeping. Or he doesn't want to have the purchase of the supplies to go through his bookkeeping.
4. For any other reason you just want to add other job costs to an invoice. When you want particular expenses to show up on reports as associated with a particular invoice.

The Problem: You've been given a job from a client, and the client has already paid some of the expenses of the job and has deducted that amount from the total that you will be paid. The challenge is that you are responsible for those expenses and you have to include them in your bookkeeping. How do you indentify and apply those expenses to that job's invoice? Those prepaid expenses have to show up as both income and expenses in your bookkeeping, so we have to do that part in a multi-step process.

Summary:

Using the Settlement sheet from your client:

A.) Enter the prepaid expenses into a bill made out to (each) company to whom the expenses were paid. Enter your client's name in the Customer:job column of the/each bill..

B.) Create a new invoice for your client (which will include all the items(both prepaid and unpaid) on the Settlement sheet.

B1.) Enter the Billable Expenses on your Invoice by means of the "Billable Time/Cost" form.

B2.) Enter the other income items from the Settlement sheet directly onto the invoice

C.) To apply the client's payment(s) (to the the supplier) and to show that those prepaid expenses are paid, create a credit memo from your invoice. All the items will by copied to the credit memo. Delete all the other items except the prepaid items.When you save the memo, it will apply the prepayments to the invoice and reduce the invoice total by that amount.

D.) Apply the Customer's Payment(s) to the Invoice using the "Receive Payments" window.

E.) Follow Up: Looking at the connected transactions that were recorded with this invoice

The follow tutorial shows and tells how to do it.

Before I start the tutorial, let me first prepare you with some explanations.

First, think about this:  your client is paying some expenses and deducting the cost from what they pay you, (yet you still run the expenses through your bookkeeping.) Even though they are not doing it this way, it’s almost as though you are paying the bill and then they are reimbursing you for the cost. The result is the same, the money comes from the client to pay the bill. I say this to prepare you to watch this video.

Next: watch this video (It goes so quickly you may want to watch it a couple times as I did.) How do I invoice a customer for expenses?

After watching the video, then read the info on this page about Credit Memos and Credits:  Applying a credit memo, credit or refund for a customer

With those explanations  as an introduction, I think the process would work something like this.

A.) First, Enter the prepaid expenses into a bill(s)

1. Your client pays the expense(s) and lists it/them as a deduction on his Settlement report that is sent with his check to you.
   1. Here is the tricky part. In order to claim those expenses as yours you must also claim the money used to pay those prepaid expenses as your income. You cannot claim those expenses as a business expense unless you also claim the income that was used to pay those expenses.
      1. Consequently, (as shown below) we have to create a bill for those prepaid expense items
      2. AND we need to include those same items on our invoice (see below) as income items.
   2. Then we will use a credit memo to show that those items have already been paid. It works kind of like "receive payments" and reduces that amount from the total due on your invoice.
2. (As shown on the above video) Now, let's enter those above mentioned expense(s) on a bill, (made out to the vendor who was paid) charged to the correct expense accounts. Use your client’s name in the Customer/Job column. (Shown circled in red below)

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B.) Create a new invoice for your client

3. Click the link to "Create invoice" for your client. Before the invoice opens the "Billable Time/Costs" message box will open asking you to make a choice. . Choose "Select te outstanding billable time and costs to add to this invoice?" Then click OK.

B1.) Enter The Billable Costs On your Invoice

4. After that message box closes another window opens. Choose the same prepaid items that you entered on the bill(s). Click OK

Those prepaid items will automatically be entered on the invoice (as circled in red in the below picture).

B2.) Enter the other "income items" from the Settlement sheet onto the invoice

5. Now enter your other income items listed on your client's Settlement sheet onto the invoice. (Shown in green below.) Enter each line item from the settlement sheet onto a separate line using the correct account. When you have finished adding the  income items, enter a short descriptiion of this invoice at the bottom in the Memo field (circled in Yellow Your note here will show on reports). (Before finishing the invoice, take note of your invoice number (circled in purple). Now click on one of the "Save" buttons (circled in blue) for this invoice.

C.) Create a Credit Memo

Now we need to mark the prepaid items on this invoice as paid. So, create a Credit Memo for the invoice.

6.  (All the items on the invoice will automatically be filled into the Memo. If so, delete the non-prepaid items that you just added to the invoice. (shown crossed in red in the picture below.) [To delete a line item, click on it and then press ctrl+delete])  Now save this Credit Memo.

When you save the memo QB will ask you to make a choice, choose “Apply to an invoice. And press OK.

From the “Apply Credit to Invoices” window, click on the listing for your invoice (circled in red below), Verify that the listing is for the correct invoice number. Notice the amount that will be applied on your credit memo (circled in blue). Click on Done.

When you go back to  the Credit memo window, make a note in the Memo section that says the client has prepaid this expense. Also enter the client’s invoice number. Save the Credit memo.

7. Now, when you are back on the Invoice window look at the bottom right corner, you should see that the credit has been applied to the invoice as a payment.

D.) Receive Payment for the balance of the Invoice

8. Now, using the Receive Payments window (see picture below),  you can apply the client’s payment to you on that invoice. You generally enter the Deposit to Undeposited Funds account, so it will show up in the Deposits window. Click on "Save & Close" (or one of the other Save buttons.)

Back at the Invoice window: Now that you've applied that customer payment, notice in the bottom right corner, the invoice balance is shown as 0.00.

You are finished! You may close out, or you may do a little follow up below.

E.) Follow Up

9. Any time that you want to see all the connected transactions to each invoice, just click on the History button. It will show both the credit memo and the client’s payment.

10. Now, whenever I print out an invoice for a client, I print out the history on the back of the invoice. That will show both you and the client the payments and credits that have been applied to this invoice.

11.  Now, do you remember that Bill that you created at the very beginning in step 2. When you applied all the payments and saved the invoice it just disappeared, deleted, gone! I didn’t see exactly at which point it was deleted, but I kept the bill opened and noticed that when I was done that bill was empty. So, you don’t have an extra bill around that hasn’t been paid.