Ah, accounting—the language of business, the code that unlocks financial success…or the monster under your desk that keeps you awake at night.
For freelancers, wrestling with invoices and expenses feels like navigating a financial jungle.
But wait, there’s hope!
Today we will wrangle two beasts that often trip up seasoned pros: Prepaid and Accrued expenses.
Pay Now, Party Later: Prepaid Expenses
Think of it like this: you are a squirrel collecting acorns for winter. That is essentially a prepaid expense—you are paying for something, those tasty nuts, which you are going to consume later.
A prepaid expense is a payment made in advance for a good or service that will be used or consumed in the future. It’s like buying a bus pass for the month; you’ve paid upfront, but the rides are your future benefit.
Examples of Prepaid Expenses:
Prepaid Rent: You cut an awesome deal, paying for 6 months of rent upfront. Excellent for cash flow; however, that rent payment will now go into your books as a prepaid expense.
Annual Software Subscription: You get a discount for buying a year’s worth of that killer design software upfront. You’ve paid, but the expense will be recorded as it is used within the year.
Office Supplies: You stock up on printer ink and paper like a stationery samurai. Those supplies are a prepaid expense until you use them.
How to Manage Prepaid Expenses:
Here’s the trick: while you have paid for these items, you haven’t actually “used up” their value. Because of that, on your financial statements—think profit and loss statement—you’ll have to spread the cost out over time, which you will benefit from. That’s where accounting magic—a.k.a. adjusting entries—happens.
Feeling a bit overwhelmed?
Don’t sweat! Billbooks offers a user-friendly platform to categorize and track expenses. Give it a try and free yourself from the accounting burden!
Accrued Expenses: The Invisible Monster Under Your Desk
Next in line are accrued expenses. These are the costs you have incurred—meaning you owe someone money for services rendered—but haven’t paid for them yet.
They’re sort of like the invisible monster under your desk—you know it’s there, looming invoices and everything, but you haven’t quite faced it (paid the bill) yet.
Examples of Accrued Expenses:
Unpaid Utilities: You consumed the electricity to fuel your all-night coding session, but the due date hasn’t arrived yet. That is an accrued expense.
Unpaid Freelancer: You hired a fellow freelancer for some aid on a project and haven’t sent an invoice. The cost of their work becomes an accrued expense on your part.
Salaries Owed: It’s payday, but haven’t hit that “send” button yet? The salaries you owe become accrued expenses.
How to Account for Accrued Expenses:
The accrued expenses, unlike prepaid expenses, do not deliver any future benefit. In essence, the service or product has been consumed.
It is, therefore, important to account for them in the current accounting period, even if the bill is yet to be received so that your financial snapshot is accurate and current.
The Accrued vs. Prepaid Tango: A Balancing Act
So, how can one remember which of these two tricky financial terms is which? Well, You pay first, and then you party—later. You party first, and then you pay—later.
Prepaid Expenses: You pay first, party later.
Accrued Expenses: You party first, pay later.
With that key distinction in mind, you will never have any problem confidently managing prepaid and accrued expenses so that your financial statements are accurate and your business is on a really firm footing.
Bonus Tip: Embrace Automation!
I mean, how many hats do freelancers have to wear?
That is a ton of invoicing, tracking of expenses, and accounting to keep up with—it’s like a three-ring circus!
Luckily, technology is your friend. Billbooks allows you to automate some of this stuff so that you can get back to doing what counts: cool work for your clients.
Takeaway: Don’t Get Lost in Accounting Hell
Mastering prepaid and accrued expenses does sound a bit difficult; on the other hand, if you understand the concept, it is the key to financial success.
Remember, knowledge is power; understanding your finances holds the key to the complete potential of your business.
So, take a deep breath, with the right tools and a bit of know-how, you can conquer this accounting jungle and be well on your way to financial freedom.
Ready to tame your expenses? Join the 30-day free trial of Billbooks.com to effectively navigate your financial journey.
