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How to record Customer prepayments for Products or Services

SOLVED•by QuickBooks•50•Updated September 20, 2023

Some Customers may pay you in advance of you raising an Invoice for the product or service provided.  These steps detail one way you could record the receipt of money from a Customer in advance of raising the Bill (Payments in Advance / Payments on Account).

Please consult your Accounting professional if you have any doubts about this process, or to see if they have a preferred method of recording these transactions.

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

In this method you enter Bank Deposits to show money received from the Customer, recording them to the Debtors / Accounts Receivable (A/R) account. This increases the Customer balance until you raise / enter the final Invoice.

  1. Enter cheques / payments made to the Supplier - IMPORTANT: VAT Codes should NOT be used on these transactions.
    1. Select + New.
    2. Select Bank Deposit.
    3. Select the Bank Account the money is received in to, and the Payment Date.
    4. Scroll down to the Add funds to this deposit section, enter information as follows:
      • RECEIVED FROM:  Customer Name
      • ACCOUNT:  Debtors (or Accounts Receivable)
      • AMOUNT:  Enter amount paid by the Customer.
    5. Click Save and close.
    6. Repeat steps 1a-1d for each payment received from the Customer in advance of raising the Invoice.
  2. Enter the Invoice
    1. Select + New.
    2. Select Invoice.
    3. Fill out the necessary information, including the VAT information.
    4. 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. In Outstanding Transactions section, tick/select the Invoices you want to associate with the prepayments.
    4. In the Credit section, tick/select the relevant Payments created in Step 1, above.
    5. If there is a balance due on the Bill, you can pay the pay the remainder by editing the Payment amount against the Invoice. If you don't want to pay the remaining 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. Go to Transactions and select Chart of accounts (Take me there).
    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 make it easier to track amounts paid.
    6. Click Save and close.
  2. Create a Service item, that posts to the above Account
    1. Go to the Gear ⚙ icon, then select Products and Services.
    2. Click New button, select 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 payment received in advance of the Invoice, posting to the new Service item.
    1. Select + New.
    2. Select Sales Receipt.
    3. Select the Customer Name, Payment Date and the Bank Account the money was received in to.
    4. In the PRODUCT/SERVICE field, select the Prepayments account created in Step 2, above.
    5. In the Amount column enter the Amount received.
    6. Select the VAT Code, click Save and close.
    7. Repeat steps 3a-3e for subsequent payments made in advance of the Invoice being raised.
  4. Enter the Invoice, ensuring 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. Select + New.
    2. Select Invoice.
    3. Enter Customer details as normal, with line items detailing the Services provided, select the relevant VAT code(s).
    4. On the last line item, select the Customer prepayments item created in Step 2, above.
    5. 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. Enter the amount being paid in the Amount box.
    4. Click Save and close.

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

  1. Go to Transactions, select Chart of accounts (Take me there), then locate 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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