How to record software subscriptions in QuickBooks Online and Xero

Each charge lands in two places: an account (what kind of cost it is) and a payee (who was paid). Get the account right once and the payee right every time, and the reports take care of the rest. The account is a chart of accounts decision, so make it deliberately rather than accepting whatever the bank feed suggests.

Neither QuickBooks nor Xero requires a particular account name, and we found no rule from either that says software must be coded to one. What follows is our suggestion, not a requirement: keep one expense account for the subscriptions your team uses, one for usage-billed hosting, and one prepaid asset account for plans paid ahead.

• Software subscriptions: the tools people log into, billed per seat or per plan, such as chat, design, documents, and project tools.
• Cloud hosting and infrastructure: servers, storage, and databases billed by use, where the amount moves with traffic or customers. If these costs scale with what you sell, your CPA may want them reported differently from overhead, so ask before you lump them with office tools.
• Prepaid software: an asset account for plans paid for more than one month ahead, released into software subscriptions as the months pass.

The steps below are from Intuit's help article on adding an account. Intuit notes the interface has been redesigned, so labels may differ slightly on your screen.

Xero Central's articles could not be read for this guide, so we do not describe Xero's screens or its list of account types. The bookkeeping is the same: a named expense account for the subscriptions, and a separate account on the asset side of the balance sheet for amounts paid ahead.

In Xero, open the chart of accounts, add the accounts, and choose the account types Xero offers. For the prepaid account, pick the closest asset type on its list. For the exact screens and the full list of types, search Xero Central for “add, edit or delete an account”.

One naming trap: Xero Central also has pages titled “prepayment”. We could not read them, so we do not say how that feature relates to a prepaid expense account. Before using it for a subscription, read those pages or ask your bookkeeper which approach your files use.

When you pay for a year, the cash goes out at once, but the cost belongs to the twelve months it covers. Under accrual basis accounting that means a prepaid expense on the balance sheet, released into expense month by month through amortization. For why the cash and the books differ, and when monthly billing is worth the premium, see annual vs monthly billing. This section is only the mechanics.

Example, with invented numbers: an annual plan costs $589.00, which is 58,900 cents. Divided by 12 that is 4,908 cents with 4 cents left over, so months 1 to 11 release 4,908 cents each (53,988 in total) and month 12 releases 4,912 cents. The schedule adds back to exactly 58,900. These are not any vendor's prices; the point is that the last month absorbs the rounding.

Intuit's page on recurring transactions describes three template types in QuickBooks Online. Scheduled templates run on their own at the interval you set, and the article's examples are rent, loan payments, and depreciation. Reminder templates are created at regular intervals, but you edit and send them yourself; the example given is a utility bill whose amount changes. Unscheduled templates are created each time you choose to use them.

Use a Scheduled template for a fixed monthly fee and a Reminder template for a usage-billed tool, where the amount changes and you want to look before it posts. The steps are: open All apps, then Accounting, then Recurring transactions; select New; choose the transaction type; name the template; pick Scheduled, Reminder or Unscheduled; set the interval; fill in the details; and select Save template. The page we read does not list which transaction types can be made recurring, so check the list on screen before you plan around a bill or expense template.

In Xero, the equivalents are a repeating bill and a repeating journal. We could not read Xero Central, so we do not describe the form; search Xero Central for “add or edit a repeating bill” and “set up a repeating journal” and follow those pages.

Whichever tool you use, a recurring template removes typing but not review. A price rise, a changed seat count, or a cancelled plan will keep posting the old amount until someone looks. Put the review in the monthly close, not in the template.

Card and bank feeds describe a charge by whatever string the merchant sends, so one vendor can arrive as several different names. That splits the total across lines in the vendor report and hides what a tool really costs. The fix is a rule that sets the payee and account for the charges you have already decided to keep.

Intuit's help article on bank rules describes the QuickBooks Online version. These are the steps it gives:

Xero has bank rules for the same job. We could not read the Xero Central article, so we say nothing about its fields or how it handles the contact. Search Xero Central for “create a bank rule” and follow it, then check one charge by hand to confirm the contact and account were filled in as you expected.

Then prove the cleanup with a report. In QuickBooks Online, the Expenses by Vendor Summary report (Reports, then Standard reports) lets you choose a period, set Display columns by to Vendors, and pick Cash or Accrual. Cash shows only payments you made; Accrual also includes open bills. In Xero, the Expenses by Contact report is the counterpart; its steps are in finding software in Xero. The QuickBooks version is in finding software in QuickBooks Online.

A clean report has one line per vendor, with no duplicates and no card-processor names standing in for the real vendor. The same cleanup feeds the software spend audit checklist and the vendor register and renewal calendar.

Some subscriptions come with an upfront setup, migration, or configuration charge. Whether that charge is expensed or capitalized is a different question from the subscription itself, and it depends on the arrangement.

What FASB's Accounting Standards Update 2018-15 says, as we read it: a customer in a hosting arrangement that is a service contract follows Subtopic 350-40, the internal-use software guidance, to decide which implementation costs to capitalize and which to expense. Training costs and certain data conversion costs cannot be capitalized. Costs from the preliminary project and postimplementation stages are expensed as the activities are performed, while costs in the application development stage can be capitalized depending on their nature. Capitalized amounts are expensed over the term of the arrangement, in the same income statement line as the hosting fees, and the update leaves the accounting for the hosting fees unchanged.

Which of your costs fall in which stage, what the “term” is for your contract, and whether the amounts are large enough to matter for your size of company are judgments we cannot make from a bill. Bring your CPA the order form, the statement of work, and the invoices, and ask how they want it recorded. Until then, code the setup fee to its own account so it can be moved without untangling it from the subscription.

General information, not tax, legal or accounting advice. How your company records software, where it sets a prepaid threshold, and how it treats setup costs is a question for your CPA.

The browser audit can rank a card or bank export by vendor without sending anything out of your browser. It makes a good first look at which payees are fragmented before you write the rules. The connected audit is planned, not live; see the savings hub.