USA Prepaid expenses from Retained earnings?

[Lauren W]

Once again I'll preface this by saying I've taken over accounting for a company whose previous "bookkeeper" was self taught and had no oversight in her 25 years with them. There's a lot of weird things going on.

I'm still working on cleaning up the balance sheet and I'm on to Prepaid expenses. In 25 years, they only ever ONCE made an entry to prepaid expenses - two journal entries on 12/31/16. Normally I'd just expense everything out the following year, easy peasy. But of course this gal did nothing in the normal way. Has anyone ever seen prepaid expenses recorded this way (again, these are the only two entries in the history of the account), and do you have a recommendation for the best way to expense them out in 2017 to get us back to zero in the account?

12/31/16
JE #1:
Debit: Prepaid Expenses $2052.00
Debit: Supplies Expense $ 57.98
Credit: Retained Earnings $2109.88

I've never seen retained earnings used for prepaid expenses... it should have been a cash (or credit card or whatever) account that actually paid the bill. There's no note at all of what the prepaid expense was, so I can't go back and check the bill of how it was paid... no idea if it was taxes, insurance, car payments, or who knows what else.

JE #2:
Debit: Prepaid Expenses $200.00
Credit: State Tax Expense $200.00

This looks like maybe she paid a state tax expense in a separate transaction, then used this journal entry to correct that the payment was actually a prepayment?

 

[bklynboy]

My guess is #1 was a correction to PY that they expensed something that should have been partly prepaid so thats what they are correcting and offsetting RE. Seems the expense was supplies which I would not consider prepaid as that is expensed as purchased even if you plan to use over time (paper, pens, staples, etc). personally, if you cant figure out what the PP asset is at this time I would just expense the whole thing (its immaterial based on your amounts) and likely not PP if its for supplies.

#2 I tend to agree was a correction in the same year that they expensed initally and now are setting up as PP. Should be able to verify by seeing what tax payments were made and if not same here I would expense given its so small.

Also, there should be a threshhold of what amount you set up as PP as these are very small and more work to account for than they are worth. Consider establishing one so that it can be easier to manage going forward.