How to Record Advance Payment from Customer in QuickBooks Online & Desktop?

Customer advance refers to the amounts received by the business from customers prior to the receipt of the goods or services. Such payments are treated as a liability on the balance sheet until the time the products or services have been rendered. Customer prepayment in QuickBooks should be recorded to manage accounts receivable best and enjoy accurate accountancy within the organization.

Why Should You Record Customer Prepayments in QuickBooks Online?

It is essential to record customer prepayments in QuickBooks as it accurately manages accounts receivable and maintains robust financial management practices within the business.

Businesses can ensure that their financial records correctly reflect the amount of revenue that is already earned and provide a clear picture of their outstanding receivables just by recording advance payments from the customer in QuickBooks. This approach also maintains the cash flow forecast and facilitates better decision-making connected to budgeting and resource allocation.

Integrating advance payments into the bookkeeping system lets you streamline the tracking and reconciliation of customer balances, decreasing the possibility of errors and ensuring transparency in financial reporting.

How to Record Advance Payment from Customer in QuickBooks Desktop?

Some customers might only pay you after you raise an Invoice for the product or service provided. These steps will highlight one way through which you can record the receipt of money from a Customer in advance of raising the Bill (Payments in Advance / Payments on Account).

If you need clarification on something in this process, it is recommended that you speak to your Accounting expert or check if they have a certain way they want these to be recorded.

How do you keep a record of VAT, and how do you remit the said VAT to the HM Revenue & Customs (HMRC).

The alternative to be chosen is:

In this method, you record the money received from the Customer through Bank Deposits, debiting it to the Debtors / Accounts Receivable account. This raises the Customer balance until you enter the last/final Invoice figure.

Enter cheques/payments made to the Supplier – IMPORTANT: No VAT Codes must be used on these transactions

To enter payments made to suppliers without using VAT codes, create a new bank deposit, select the bank account, enter payment details, and save. Repeat for each payment.

Following the step-by-step information below:

Step 1: Create a New Bank Deposit

Click on the + New button.

Step 2: Select Bank Deposit

Choose Bank Deposit from the menu that appears to open a new bank deposit form.

Step 3: Select the Bank Account

Select the bank account into which the money was deposited.

Step 4: Enter the Payment Date

Input the date when the payment was received.

Step 5: Add Funds to the Deposit

Scroll down to the Add funds to this deposit section and enter the following information:

• RECEIVED FROM: Customer Name
• ACCOUNT: Debtors (or Accounts Receivable)
• AMOUNT: Enter the amount that is paid by the customer.

Step 6: Save the Deposit

Review the information to ensure it is correct. Once you are satisfied, click on Save and Close to record the transaction.

Step 7: Repeat for Each Payment

Repeat step 1 through 6 for each payment received from the customer in advance of raising the Invoice.

Enter the Invoice

To enter an invoice, select “Invoice” from the menu, fill in customer and VAT information, then review and save to finalize the invoice.

Step 1: Select Invoice

Click on the + New button, then choose the Invoice from the menu that appears.

Step 2: Fill out Customer Information

Fill out all the necessary customer information and also VAT information.

Step 3: Review and Save

Once you’re satisfied, click on the Save and Close option to finalize the Invoice.

Apply prepayments to the Invoice

How to apply prepayments to an invoice, open the invoice, click “Receive Payment,” select outstanding transactions and relevant payments, handle any balance due, then save the transaction.

Step 1: Locate and Open the Invoice

Find the Invoice for which you want to apply the prepayment.

Step 2: Click on Receive Payment

Once you have the Invoice open, click on the Receive payment option.

Step 3: Select Outstanding Transactions

In the receive payment window, you will see an Outstanding Transactions section. Here, you can select the invoices you want to associate with prepayments.

Step 4: Select the Relevant Payments

In the credit section, select the relevant payments that you created in Step 1.

Step 5: Handle the Reminder

If there is any balance due on the bill after applying the prepayments, you can pay the remainder by editing the payment amount against the Invoice. If you don’t want to pay the remaining amount at this time, you can edit the Amount figure in the Outstanding Transactions section.

Step 6: Save the Transaction

Once you’re satisfied, click on the Save and Close option. 

Recording Customer Prepayments in this way helps to report VAT to HMRC when the prepayment is received. In this example, we recorded a payment against a current liability account. Consult your accounting professional and ask him or her whether he or she has any specific preferred form of handling such transactions.

Create a Current Liability account through which you can track prepayments

Create a Current Liability account for tracking prepayments, navigate to the Chart of Accounts, select Current Liabilities, name the account, and then save the transaction.

Step 1: Navigate to the Chart of Accounts

Navigate to the transaction menu and select the Chart of Accounts option. Then, from the Account window charts, select the New button.

Step 2: Pick Current Liabilities

Now, from the Account Type and Detail Type drop-down menu, select the Current Liabilities option.

Step 3: Enter the Account Name

Now, enter the relevant account name, for example, Customer Prepayments, and then click the OK option.

Important Note: If a small number of Customers pay you through this method, then you can create Sub-Accounts for every customer, as this might make it easy to track amounts paid.

Step 4: Save the Transaction

Once you’re satisfied, click on the Save and Close option.

Create a Service item that posts to the above Account

To create a service item posting to the account, go to Products and Services, select “New Service,” name it, choose the income account, and save the item.

Step 1: Choose Product and Services

Navigate to the Gear icon, then choose the Products and Services option.

Step 2: Navigate to Service

Now, click on the New button and select the Service option. Then, enter a Name, e.g., Customer Prepayments.

Step 3: Go to the Income Account

Navigate to the Income Account section from the drop-down menu and choose the Account that was created in Step 1. Then, click on the Save and Close button.

Enter Sales Receipts for each payment that is received in advance of the Invoice, posting to the new Service item

How to enter sales receipts for advance payments, select “Sales Receipt,” choose the customer, bank account, and prepayments service item, enter the amount, apply VAT code, then save the receipt. Repeat for each payment.

Step 1: Navigate to Sales Receipt

Choose the + New option, then choose the Sales Receipt.

Step 2: Choose the Bank Account

Now, select the Customer Name, Payment Date, and the Bank Account from which the money is received into.

Step 3: Select the Prepayments Account

In the PRODUCT/SERVICE field, choose the Prepayments account, which was created in Step 2 above.

Step 4: Select VAT Code

Now, in the Amount column, enter the amount that was received. Then, select the VAT Code and click on the Save and Close option.

Note: You are required to repeat the steps for the following payments, which were made before the Invoice was raised.

Enter the Invoice, and make sure that the prepayments are taken into Account

To enter an invoice and account for prepayments, select “Invoice,” enter customer details, add services, then choose the prepayment item and enter the prepayment amount as a negative value with the VAT code.

Step 1: Navigate to Invoice

First, click on the + New option, and then select Invoice.

Step 2: Enter the Customer Details

Now, enter the Customer details as normal,  with the line item detailing the Services provided, and choose the relevant VAT code(s). From the last line item, choose the Customer prepayments item created in Step 2 above.

Step 3: Enter the Prepayments Amount as Negative

Enter the prepayment amount as the negative value, and choose the VAT Code that was used in Step 3 above.

Important Note:  The amount in Step 4 is required to be entered as the negative value with the VAT code selected, as this makes sure that the VAT isn’t counted twice.

Pay the balance of the Invoice – If there is any balance due after the prepayment is applied

To pay the remaining balance of an invoice after applying prepayments, open the invoice, click “Receive Payment,” enter the paid amount, and save the transaction.

Step 1: Navigate to Receive Payment Button

First, navigate and open the Invoice. Then, from the top right-hand corner, click on the Receive Payment button.

Step 2: Enter the Amount Paid

Enter the amount that is being paid in the Amount field. Then, click on the Save and Close option.

How to Record Advance Payment from Customer in QuickBooks Online?

If you’ve received advance payment from customers, then you can record it very easily in QuickBooks Online while using the Receive Payment feature.

To record an advance payment in QuickBooks Online, add or verify the customer, select “Receive payment,” choose the customer, apply the payment, review, and save the transaction.

Follow the steps mentioned below to record advance payment:

Step 1: Verify or Add the Customer

Go to the Sales menu and select Customers.

1. If the customer is already listed, you can skip to step 3.
2. If the customer is not listed, click on New or Add New to create a new customer profile. Fill in the required information and click Save when you are done.

Step 2: Record the Received Payment

After confirming or adding the customer, go back to the Sales tab and click on + New:

1. Select Receive payment from the option.
2. Choose the customer from the drop-down list.
3. Under the Account column, select the Invoice to which the payment should be applied.
4. Enter the amount of the payment received in the appropriate field.
5. Review the information to ensure it is correct.
6. Click Save and New if you need to record additional payments or Save and Close if you’re finished.

What Are the Benefits of Recording Advance Payment from Customers in QuickBooks?

There are various benefits of recording advance payment from customers, including:There are various benefits of recording advance payment from customers, including:

1. Better cash flow management
2. Correct financial reporting
3. Upgraded customer satisfaction

Recording advance receipts from customers aids in the management of cash as it shows the specific sources of cash inflow into the business. This approach also helps businesses to sort and deploy resources in the right manner. Most of the time, businesses need more resources to sort and arrange the material.

Due to the adequate processes in the system, the financial reporting is correct in order to provide the businesses with the proper decision-making process according to the received data. They increase customer satisfaction by enabling correct and efficient invoicing that paves the way for good customer relations and efficient invoicing.

Customer prepayments are defined as the funds that are received from the customers in advance of the delivery of goods or services. These prepayments are accounted as liability until the products or services are provided. It is essential to manage customer prepayments as a part of maintaining financial stability and ensuring smooth transactions.