What is a Prepaid?
This week we’re talking about one of the top 3 ways to make your Income Statement more helpful - prepaids.
A prepaid account is like a holding account on the Balance Sheet to keep expenses off the Income Statement until they are going to be used.
If you have no process in place for recording prepaids, then your Income Statement will never be as helpful as it could be.
To make the Income Statement really helpful for evaluating the hotel’s performance each month, its important to have ONLY the expenses for that specific month on the monthly Income Statement.
So if you get an invoice for next months rent, or an insurance policy that cover 6 months, the team needs to know the best practice for coding those invoices to prepaid and getting them on the Income Statement at the right time.
We have an AP training for EVERY person on your team who will be entering invoices that covers this and other key elements of posting Accounts Payable in our AP training. You can learn more about that by clicking on the link here: AP training.
One of the biggest traps I see people fall into though, and I what I want to cover in this video, is the process for not only getting invoices coded to a prepaid account, but also getting things moved OUT of the prepaid account.
Here are my top 2 tips for getting this process right:
Set a threshold for what amount can be coded to prepaid. The prepaid account requires a detailed schedule for the accountant to keep along with journal entries for getting things moved out at the appropriate time. So coding EVERY single invoice to prepaid because $20 of it might be used the following month is no good. There will be a way bigger cost than reward if too many items are coded to prepaid. So you may have a threshold like no invoice less than $1000 can be coded to prepaid.
When an invoice is coded to prepaid, it has to have a description that says when and how it should be moved out of the prepaid account. Like I mentioned, its just a holding account and there has to be a plan for moving it out. The person who is looking at the invoice and deciding if it is a prepaid is the best person to say “and it needs to be moved to the Income Statement at this date and go to this account”. If it is a service that covers multiple months, then your description might be something like (expense to Rooms Contract Services Jan-Jun).
Again, have a threshold for what can be coded to prepaid, and require a description that says how and when an item should be moved out of the prepaid account!
So your tip for the week is code invoices that are going to be used in the future to a prepaid account so they will show up on your Income Statement at the right time. This will help you use your Income Statement to evaluate the exact operations of the hotel each month!