Record a prepayment transaction in QuickBooks Online (QBO)
Are advance payment, deposit, and prepayment any different?
Advance payment is to pay your supplier before the goods arrive; it could be a credit management policy at the supplier’s end. New customers would have no or limited credit facility. In most cases, you must pay fully before the supplier releases the goods or fulfiling a service. It’s common to make an advance payment to an overseas supplier, purchase downloadable goods such as software, buy from an online store, or sometimes, preorder goods before the product reaches the market.
Deposit is advancing to the seller to secure goods or services, primarily partial payment. The goods or services ordered could have exceeded the credit limit, a seller’s credit control policy, or shown commitment. Often, we see a deposit as a form of security when renting premises, utilities, projects, and custom-made goods and services. For example, a tailor would request a deposit when you are making customised clothing. An interior designer requests a deposit to start the renovation project. Depending on the agreement, a deposit could be refundable if goods or services failed to be delivered, the contract expired, or a security deposit.
Prepayment is similar to advance payment; however, prepayment tends to be for goods and services you would receive much later or in a recurring form. The payment for membership subscriptions and service maintenance are examples of prepayment. You could subscribe to an IT maintenance contract you paid annually to an outsourced IT company for monthly maintenance of your office computers and network.
They are not the cost of sales or expenses since you have yet to receive the goods or services; therefore, they are current assets accounts if you pay a deposit, advance payment, or prepayment to your supplier. The journal entry would debit the deposit, advance payment, or prepayment, and the other leg of the journal would credit the bank or accounts payable. Confusing? As a layperson, it could be better to leave the classification of accounts to the expert—your accountant. The deposit is refundable or part payment to a layperson, whereas advance payment and prepayment are to pay for goods or services before you receive them. In short, money goes out before receiving goods or services.
So, if you need to prepay your supplier, how do you record the prepayment in QuickBooks Online (QBO)?
Consider using a Cheque, Bill or General Journal in QuickBooks Online (QBO). Use Bill if you received a prepayment invoice from your supplier. General Journal could sometimes be challenging to a layperson; consider cheque transactions if making a payment without a bill. Select the transaction type from the +New. Then, follow the entry form to select the supplier and enter the reference, date, and the appropriate account (i.e., advance payment, deposit, or prepayment).
The money paid is on the balance sheet. How do you offset the bill you have received?
Advance payment and deposits.
The entry for the advance payment and deposits are similar. For example, you made an advance payment of $5,000 to a supplier for goods. The journal behind the entry is debit advance payment and credit bank $5,000.
You received a bill from the supplier for the $5,000 goods you purchased.
Click the +New button and select Bill. Select the supplier, and enter the reference number and date into the Bill entry.
Under the Category section, select the ledger account (e.g., Cost of Sales), and enter $5,000 in the amount column. The bill would debit the cost of sales and credit the accounts payable $5000. Since you have already paid, you must reverse the advance payment to offset the bill. Some users may prefer to less the advance payment directly from the bill, such as:
Row 1: Cost of Sales: $5,000
Row 2: Advance Payment: -$5,000
The gross bill will be $0 (5,000 – 5,000).
Although posting to the ledger was correct, the bill amount in the expense list will show $0, which could be confusing. You must click the view option in the action column to view the bill transaction for more information.
I prefer to separate the transaction by entering a journal to revert the advance payment. The journal entry will debit the accounts payable (select the supplier from the name column) and credit the advance payment. Then, do a pay bill, choose a dummy bank account, select the bill to pay, and the credit of $5,000 will auto-apply to the outstanding.
Prepayment.
You have already entered the bill for prepayment—for example, an insurance premium of $2,400 from April 2024 to March 2025. If your financial year of January to December, April to December 2024 will be current year expense, and January to March 2025 will be next year’s expense, the prepayment.
The bill could be:
Row 1: General Insurance (memo: current year): $1,800
Row 2: Prepayment (memo: General Insurance): $600
Your bill total is $2,400
During the following financial year, you enter a journal entry to revert the prepayment by debiting the general insurance and credit prepayment account $600.
Alternatively, enter the bill as $2,400 and charge it to the prepayment account. Then, make a monthly journal entry to debit the general expense of $200 and credit the prepayment. This method could be more straightforward as you can set a recurring template to enter the journal when it is due.
Deposit Refund.
Suppose the supplier sends you a payment for a refund of the security deposit without any bills. You may enter a bank deposit (from the +New button), select the bank from the deposit to field, and enter the refundable deposit account in the details. Alternatively, you may enter as a general journal to debit the bank and credit the refundable deposit account.
Contact us if you currently use QuickBooks Desktop or Reckon Accounts and want to switch to QuickBooks Online.