How to Handle Prepaid Inventory

To handle prepaid inventory in QuickBooks Online, you need to record the initial payment as an asset and then convert that asset into Accounts Payable when the bill arrives. This ensures your inventory quantity on hand remains accurate until you physically receive the items.

Step 1: Create a Purchase Order

If you use Purchase Orders to track orders, create one first so you can receive the inventory against it later.

1. Select + New.
2. Select Purchase Order.
3. Fill in the vendor details and add the products/services you are ordering.
4. Select Save and close.

Step 2: Record the Prepayment

When you pay the vendor before receiving the inventory, record the payment to a Prepaid Inventory (or Other Current Asset) account. This keeps the payment off your Accounts Payable and inventory counts until the items arrive.

1. Select + New.
2. Select Check (or Expense if paid by debit card, wire, or online transfer).
3. In the Payee field, select the vendor.
4. In the Account column (or Category field), select Prepaid Inventory (or your specific Other Current Asset account).
   • Note: If you do not have this account, select + Add new to create it as an Other Current Asset.
5. Enter the payment amount and Save and close.

Step 3: Receive the Inventory and Enter the Bill

When the items arrive, you will enter the bill to update your inventory quantity and record the liability.

1. Select + New.
2. Select Bill.
3. Select the vendor. If you created a Purchase Order, it will appear on the right side.
4. Select Add for the relevant Purchase Order to populate the items.
5. Select Save and close.

Step 4: Apply the Prepayment to the Bill

Finally, apply the funds from the Prepaid Inventory account to the open bill.

1. Go to the Expenses menu (or Vendors).
2. Select Vendors.
3. Locate the vendor and select their name to open the vendor profile.
4. In the Transaction List tab, find the bill you just created and open it.
5. Select Make payment.
6. In the Payment section, ensure the Bank account is the original account used to pay the vendor in Step 2.
7. In the Credits section (or Applied Credits), select the prepayment amount to apply it to the bill.
8. Verify the Payment amount is $0.00 (since the credit covers the bill).
9. Select Save and close.

This process moves the money from your Prepaid Inventory asset account to pay the bill, leaving your Accounts Payable balance at zero and correctly increasing your inventory on hand.