Handling Prepaid Supplies...It's Easier than You Thought

Here is the check entry (Banking > Write Checks) for a $10,000 prepayment for fertilizer:

The first detail line of the check probably looks familiar. It posts $10,000 to an account named Fertilizer Expense, just as you might record fertilizer expense on any check. The second and third lines may be less familiar. The second line increases the balance of Prepaid Supplies—an asset account—by $10,000, and the third line offsets that amount by posting an equal but opposite (negative) amount to Adjustments & Offsets, which is an equity account. These two lines cancel each other out, leaving the net amount of the check at $10,000.

Explanation:  Most farm/ranch record keepers use QuickBooks as a single-entry accounting system. However, "under the hood" QuickBooks is a double-entry system, meaning that every transaction affects at least two accounts (even when you don't realize it). Having an equity account like Adjustments & Offsets to use for "throwing away" the parts of double-entry transactions which you don't want, allows single-entry record keepers to do special (double-entry) kinds of things without affecting the wrong accounts.

Prepaid Supplies could be set up as an Other Current Asset account, but as you will see later there are advantages to setting it up as a Bank type account:

"Wait a minute!", you might say, "Prepaid Supplies has nothing to do with checking accounts or banking! Why are you calling it a bank account?" I'm not; I'm only assigning it the Bank account type. In QuickBooks:

1.Account types represent categories of information, which may include things beyond what their name implies. Bank type accounts represent a category of current assets but they are not required to correspond to real-world bank accounts. In fact, Bank type accounts are frequently used for other purposes, such as Clearing accounts (described in The QuickBooks Farm Accounting Cookbook™ series.)

For balance sheet accounts (assets, liabilities, and equity), the account type also determines where—in what order—accounts appear on balance sheet reports. Bank type accounts appear first in the current assets section of a QuickBooks balance sheet.

2.The account type determines what kinds of behavior QuickBooks will allow for an account. QuickBooks will let you use Bank type accounts in the Write Checks and Pay Bills windows, for instance, while most other account types cannot be used in those windows.. Setting up Prepaid Supplies as a Bank type account allows using it in the Write Checks window, which is the main reason for setting it up that way, as you will see in the next topic below.

Using an Adjustments & Offsets account is described in some volumes of The QuickBooks Farm Accounting Cookbook™ series, so you may already have one in your chart of accounts. If not, here is the setup window for that account:

Next spring after some fertilizer has been applied, the fertilizer dealer's monthly statement should show how much of your prepayment was used to "purchase" fertilizer. Having that information makes it easy to reduce the balance in Prepaid Supplies by the same amount.

Let's say the statement shows that $7,000 of your prepayment has been applied to fertilizer purchases. Because Prepaid Supplies was set up as a Bank type account, updating its balance is as simple as writing a check—not a real check, but an entry in the Write Checks window to draw $7,000 out of Prepaid Supplies:

Things to notice:

❖Prepaid Supplies is selected as the bank account.

❖The fertilizer dealer, Farmer's Cooperative, is selected as the payee. Though this check will neither be printed nor sent to the dealer, selecting the dealer here links the transaction with the dealer, making it easy to find in QuickBooks later if the need arises.

❖Adjustments & Offsets is selected as the "expense" account. Remember, it is not an expense account but rather an Equity type account. So, this check simply reduces the balance in Prepaid Supplies by $7,000 and "throws away" the offsetting part of the transaction by posting it to Adjustments & Offsets. No actual expense account will be affected, and none should be! Why? Because the fertilizer was already deducted as an expense in the prior year, when the $10,000 prepayment was made.

Do not record the fertilizer as an expense here. If you do, your tax records will be incorrect deduct the same expense in two different tax years!

If we prepared a balance sheet report after entering the $7,000 "check" shown above, it might look something like this report fragment:

The $3,000 balance shown for Prepaid Supplies is correct; it is the amount of asset value remaining after subtracting $7,000 from the original $10,000 prepayment.

But do you notice a problem? Prepaid Supplies is listed in the Checking/Savings section of the report and included in the Total Checking/Savings amount. Nothing is technically wrong here—all of the dollar amounts are correct, and Prepaid Supplies is listed in the current assets section of the report. But to someone else who might look at your balance sheet—your lender, partners, or others—having Prepaid Supplies listed in the Checking/Savings section may raise doubts about whether the report is accurate.

Fortunately, QuickBooks makes this easy to fix: simply change Prepaid Supplies' account type from Bank to Other Current Asset:

After making this change, Prepaid Supplies will appear in the Other Current Assets section of balance sheet reports, where it should be:

After preparing a balance sheet report, be sure to change Prepaid Supplies' account type back to Bank. Because QuickBooks won't let you select it in the Write Checks window, until you make it a Bank type account again.

Mark Wilsdorf was raised in agriculture, has been deeply involved in it all of his life, and has worked with QuickBooks and accounting software for much of that time as well. He was editor of AgriComp, the first national magazine for agricultural computing, has authored several books about using QuickBooks in agriculture (The QuickBooks Farm Accounting Cookbook™ series), has done consulting work for Fortune-500 businesses serving agriculture, and has been the lead developer on QuickBooks-related software projects, including several QuickBooks add-ons.

If you wanted proof that Mark always has at least one foot in agriculture you might look around his office at home....where you would find things like a folder of soil test reports, calf obstetrical supplies, a seed sample waiting on a germination test, a stack of machinery parts catalogs, and a lariat he will never really learn to use well.

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