A prepaid expense is something you pay for now and use over the coming months, like an annual insurance policy or a yearly software plan. Recording it as a prepaid expense spreads the cost across the months it covers, so one big bill doesn't make a single month look terrible.
What counts as prepaid
Common examples in a DPC practice:
- An annual malpractice or liability policy paid in full.
- A yearly software or EHR plan paid up front.
- Annual dues, licenses or subscriptions.
- Rent paid several months in advance.
Two ways to record it
The quick way is to record the whole payment as an expense in the month you pay it. The more accurate way is to record it as an asset called prepaid expenses, then move one month's share to the expense account each month.
In a made-up example, you pay $2,400 in January for a year of software. Recorded all at once, January shows a $2,400 software expense and the other 11 months show nothing. Spread out, each month shows $200, and the January P&L reflects what the month cost to run.
Why it matters for your decisions
If you look at monthly profit to decide on owner pay, a hire or a price change, lumpy expenses mislead you. A month with three annual renewals looks like a bad month, even when the practice is doing fine. A month with none looks better than it is.
Your cash still drops by the full amount on the day you pay. That's a cash planning question, and it's why I'd set money aside monthly for big annual bills. This post shows how for insurance.
Cash basis and your tax return
Many small practices file taxes on a cash basis, and there are rules about when a prepaid amount can be deducted. That's your CPA's call, and it doesn't have to match how your monthly management books show it. This post explains cash and accrual.
Keep it simple
I wouldn't spread every $30 annual subscription. Pick a dollar line, such as anything over $1,000, and only spread those. Small items can go straight to expense without changing the picture.
What I'd do this week
- List every bill you pay annually or several months ahead, with the amount and the months it covers.
- Mark the ones over the dollar line you pick.
- Send the list to your bookkeeper so those get spread across their months.
- Note the renewal dates on your calendar so the cash is ready.
Common questions
Does spreading the cost change my taxes?
Not by itself. How and when a prepaid amount is deducted on your return is up to your CPA and the tax rules.
Where does a prepaid expense show up?
On your Balance Sheet, as a current asset. It shrinks each month as that month's share moves to the P&L.
What if I cancel partway through the year?
Any refund reduces the prepaid balance. Whatever's left without a refund gets expensed when the service ends.
Want monthly profit that isn't skewed by big bills?
We reconcile every account every month and send your P&L and Balance Sheet by the 15th, so decisions like this start from real numbers. If that's what you need, apply to work with us.