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How to Manage Prepayments by Customer in QuickBooks?

QuickBooks is a one user-friendly solution that combines a variety of businesses processes in one place and provide all of these solutions in an integrated environment. QuickBooks is one of the fastest growing software for small and medium sized business and offer desktop based in-house accounting applications as well as cloud-based versions that accept and manage business payments and also it is one-click solution to pay bills, QuickBooks also simplified the payroll functions. QuickBooks software is a great software to assist small and medium sized business running their business smoothly and hassle free.

Today we will talk about how to handle customer prepayments in QuickBooks. We will look at a process to see how to manage the accounts receivable and the profit and loss reports accurately.

It doesn’t matter whether you are in the landscaping industry, doing construction, trading or dealing in any other type of industry, upfront payments always help cash flow and make you able to pay your employees and purchase inventory for the job. It varies how they can be recorded in QuickBooks.

When a customer prepays, it should be recorded as a liability because now you owe the customer something and you haven’t really earned that money yet.

What is a prepayment?

A prepayment is made

  • If a seller received a payment from the buyer
  • Before the seller has completed the services OR transited goods to the buyer.
  • Prepayments occurred under these three circumstances:
    • A buyer wants preferred treatment for an order.
      • The buyer limit of credit with the seller is used and buyer refused to give credit.
        • The buyer is following the cash basis of accounting and wants to recognize an expense early by getting paid early.

A prepayment is recorded as an asset by a buyer, and as a liability by a seller.

So in this case we will record prepayments by customers as a liability. It can be done easy in QuickBooks as QuickBooks is one of the easiest and most convenient accounting software to handle transactions like this.

Now take a look at steps that you can follow in QuickBooks to record prepayments made by customers.

One Time Setup:

Now follow these steps for one-time setup for the item Prepayment.

  • Make a new account for deposits by creating Other Current Liability Account (e.g. Customer deposits, Prepayments, Retainers, Unearned Income etc.)
  • Go to List than to Chart of Accounts than New and then Current Liability.
  • Create a prepayments/Deposits item.
  1. Press List>Item>New Item.
  2. Type Service if it is for upfront deposit or retainer for services.
  3. Type Other Charge if upfront deposit for products.
  4. Choose Item Name: You can name it Prepayment or Upfront Deposit.
  5. Other Current Liability Account is created now for Prepayments from customers.

Steps to follow:

  • First create an account called Upfront Payments OR Prepaid Customers for tracking these prepayments.
  • Choose the Account Type as Current Liability.
  • You will deposit the prepayments to this new Liability account.
  • UsePrepaid Customersas G/L code.
  • Then go to Customer and then Enter Credit Memo Refund.
  • For the customer enter a Credit Memo of the same amount which you enteredin check.
  • Create an item code to point back to this same account Upfront Payments OR Prepaid Customers.
  • Using this item code create a credit memo.
  • Your Upfront Payments OR Prepaid Customersaccount should be “0”.
  • Your Open Accounts Receivable should have credit balance.
  • Most of the time inventory is ordered with the prepayment, and before the inventory is received there will be a time lapse.
  • When the inventory is received and time come to make an invoice to the customer.
  • Next step will be one in which invoice is entered.
  • To do that click Customer and enter Invoice.
  • Apply prepayment, after when you create the invoice.
  • Now click at the top button Apply Credits.

Hopefully following the above steps you were able to manage the prepayments by customers in QuickBooks. If you encounter any problem regarding prepayments by customers, you can always call QuickBooks Expert team which will assist you and guide you and if you want to get any other information regarding this topic you can contact QuickBooks.

  • Click done, after choosing the correct entry from prepayments entries.
  • Now your Accounts Receivables should show the prepayment amount.

QuickBooks Desktop version is recommended to track inventory that’s why these above steps shown are displayed in QuickBooks Desktop version. More prepayment can be added to a customer if needed and when needed and you can apply to customer’s purchases a running balance of available credit.

Note that if prepayment and inventory is of the same amount than Accounts Receivable would be zero but in the above example the amount of prepayment is different from the amount of purchased inventory that’s why we got that total value.

For Prepayment Report

To get Summary Report of Prepayments by Customers:

  1. Start by clicking on Reports> Customers and Receivables> Customer Balance Summary.
  2. Click on the Customize Report.
  3. Click Advanced Options on the Display Tab.
  4. Then select Rows + Non-Zero
  • Click Account on the Filters tab
  • Then select Prepayment/Deposit liability account.
  • Click on the Header/Footer tab and name your report if you intend to use this report frequently.
  • Run the Report and then memorize.

You should periodically reconcile the Prepayment account to clear-out any finished projects so the you won’t stay in your reports.

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