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How to Record Customer Prepayments for Products or Services

In this Article we are going to talk about How to Record Customer Prepayments for Products or Services in 2020.

Some Customers may additionally pay you in develop of you elevating an Invoice for the product or carrier provided. These steps element one way you could report the receipt of money from a Customer in advance of raising the Bill (Payments in Advance / Payments on Account).

Please consult your Accounting expert if you have any doubts about this process, or to see if they have a favored approach of recording these transactions.

How do you report your VAT to HMRC? (select the applicable option below)

In this technique you enter Bank Deposits to exhibit cash acquired from the Customer, recording them to the Debtors / Accounts Receivable (A/R) account. This increases the Customer balance until you raise / enter the closing Invoice.

  1. Enter checks / payments made to the Supplier – IMPORTANT: VAT Codes should NOT be used on these transactions.
    1. Click the plus icon in the top right-hand corner, Choose Bank Deposit.
    2. Select the Bank Account the money is received in to, and the Payment Date.
    3. Scroll down to the Add dollars to this deposit section, enter information as follows:
      • RECEIVED FROM:  Customer Name
      • ACCOUNT:  Debtors (or Accounts Receivable)
      • AMOUNT:  Enter amount through the Customer.
    4. Click Save and close.
    5. Repeat steps 1a-1d for each charge obtained from the Customer in improve of elevating the Invoice.
  2. Enter the Invoice
    1. Click the plus icon in the pinnacle right-hand corner, pick Invoice.
    2. Fill out the necessary information, including the VAT information.
    3. Click Save and close.
  3. Apply prepayments to the Invoice.
    1. Locate and open the Invoice.
    2. In the top right-hand corner, click Receive payment.
    3. Outstanding Transactions section, tick/select the Invoices you want to associate with the prepayments.
    4. In the Credit section, tick/select the applicable Payments created in Step 1, above.
    5. If there is a balance due on the Bill, you can pay the pay the rest by means of editing the Payment amount towards the Invoice. If you don’t want to pay the last amount, edit the Amount figure above the right-hand side of the Outstanding Transactions section.
    6. Click Save and close.

Recording Customer Prepayments in this way ensures VAT is reported to HMRC when the payments are received. In this example we have tracked payments against a Current Liability account.  Please consult your Accounting professional to see if they have a preferred method of recording these transactions.

  1. Create a Current Liability account to track prepayments.

    1. Click Accounting in the left-hand navigation bar, choose Chart of Accounts.
    2. In Chart of Accounts, click New button.
    3. From the Account Type drop-down list, choose Current Liabilities.
    4. From Detail Type drop-down list, choose Current Liabilities.
    5. Enter the account Name, e.g. Customer Prepayments, click OK.
      • Tip:  If a small number of Customers pay you in this way, you could create Sub-Accounts for each Customer, as this may additionally make it easier to track amounts paid
  2. Create a Service item, that posts to the above Account

    1. Click the plus icon in the pinnacle right-hand corner, select Products and Services.
    2. Click New button, Pick Out Service.
    3. Enter a Name, e.g. Customer Pre-Payments.
    4. Go to the ‘Income Account’ field, from the drop-down select the account created in Step 1, above.
    5. Click Save and Close.
  3. Enter Sales Receipts for each charge received in advance of the Invoice, posting to the new Service item.

    1. Click the plus icon in the top right-hand corner, select Sales Receipt.
    2. Select the Customer Name, Payment Date and the Bank Account the cash used to be obtained in to.
    3. In the PRODUCT/SERVICE field, select the Prepayments account created in Step 2, above.
    4. In the Amount column enter the Amount received.
    5. Select the VAT Code, click on Save and close.
    6. Repeat steps  for subsequent payments made in advance of the Invoice being raised.
  4. Enter the Invoice, making sure the prepayments are taken in to account.  TIP – See the last section at the bottom of this article for a Report that shows amount of prepayments made.

    1. Click the plus icon in the top right-hand corner, Select Invoice.
    2. Enter Customer details as normal, with line items detailing the Services provided, select the relevant VAT code(s).
    3. On the last line item, select the Customer prepayments item created in Step 2, above.
    4. Enter the amount of prepayments as a Negative value, select the VAT Code used in Step 3, above.
      • IMPORTANT – The amount in Step 4d needs to be entered as a negative with a VAT code selected, as this ensures VAT isn’t counted twice.
  5. Pay the Invoice balance – If there is a balance due after the prepayment is applied.

    1. Locate and open the Invoice.
    2. In the top right-hand corner, click Receive payment button.
    3. Then in the Amount box enter the amount.
    4. Click Save and close.

To help identify the amount of prepayments made to a Supplier, you can run the following report:

  1. Click Accounting in the left-hand navigation bar, discover the Customer Prepayments account.
  2. In the Actions column to the right-hand side, click the drop-down next to Account history, select Run Report.
  3. Select the required date range by clicking the Report period drop-down
  4. If you have all Customer prepayments going to the same account, click the Group by drop-down and select Name.
  5. Click Run report.

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