How to Record Customer Prepayments in QuickBooks Desktop and Online?

Customer Prepayments are also known as Customer Deposits, where funds are received from customers in advance of the delivery of goods or services. These prepayments are accounted for as liabilities until the products or services are provided.

This accounting process is important to accurately know your company’s financial position and ongoing obligations. When a customer provides a prepayment, it affects the balance sheet by increasing the company’s liabilities and cash/assets.

Accurately recording customer prepayments in QuickBooks keeps your books organized and up-to-date and maintains financial stability, ensuring better cash flow and financial management. Recording customer prepayments also involves aligning invoicing procedures with the delivery of goods or services to provide transparency and strengthen the overall business finance strategies.

Why do you need to Record Customer Prepayments in QuickBooks?

Recording customer prepayments in QuickBooks is crucial to accurately manage accounts receivable and maintain robust financial management practices within the business.

By recording customer prepayments in QuickBooks, businesses can ensure that their financial records accurately reflect the amount of revenue already earned, providing a clear picture of their outstanding receivables. This practice also allows you to get more accurate cash flow forecasts and make better decisions related to budgeting and resource allocation.

Integrating prepayments into the bookkeeping system offers streamlined tracking and reconciliation of customer balances, reducing the occurrence of errors or fraudulent activities, and ensuring complete transparency in financial reporting.

Steps to Record Customer Prepayments for Products or Services

Some customers may pay you in advance if you raise an invoice for the products or services provided.  Below are the steps to record the receipt of money from a Customer in advance of raising the Bill (Payments in Advance / Payments on Account).

How do you report your VAT to HMRC?

For this, you enter bank deposits to show money received from the customer, recording it in the Debtors/Accounts Receivable (A/R) account. This increases the Customer balance until you raise/enter the final Invoice.

Here’s how:

Step 1: Enter cheques/payments made to the Supplier

IMPORTANT: VAT Codes should NOT be used on these transactions. 

1. Click + New.
2. Select the Bank Deposit option. 
3. After this, choose the Bank Account the money is received into, 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 the amount paid by the Customer.

5. Press the Save and Close buttons.
6. Repeat steps 1a-1d for each payment received from the Customer in advance of raising the Invoice.

Step 2: Enter the Invoice

1. Select + New.
2. Click Invoice.
3. Fill out the necessary information, including the VAT information.
4. Hit the Save and Close tabs.

Step 3: Apply Prepayments to the Invoice

1. Locate and open the Invoice.
2. Select Receive Payment at the top right-hand corner.
3. Tickmark/choose the Invoices you want to associate with the prepayments in the Outstanding Transactions section.
4. Under the Credit section, click on the relevant Payments created in Step 1 above.
5. Edit the Payment amount against the Invoice to pay the remainder if there is a balance due on the Bill. 
6. However, if you don’t want to pay the remaining amount, change the Amount figure above the right-hand side of the Outstanding Transactions section.
7. Press Save and Close.

Recording Customer Prepayments in this way ensures VAT is reported to HMRC when the payments are received. Thus, we have tracked payments against a Current Liability account.  

Create a Current Liability account to track Prepayments

1. Navigate to Transactions and then choose a Chart of Accounts.
2. Press the New button under the Chart of Accounts.
3. Select Current Liabilities from the Account Type drop-down list.
4. In the Detail Type drop-down list, click on Current Liabilities.
5. Enter the account Name, e.g., Customer Prepayments, and then hit the OK tab.

Tip: If a small number of Customers pay you in this way, you can create Sub-Accounts for each Customer as this will make it easier for you to track the amounts paid.

6. At last, click Save and Close.

Create a Service item that posts to the above Account

1. Move to the Gear icon and then click on Products and Services.
2. Press the New button and select Service.
3. Enter a Name like Customer Prepayments.
4. Hover over the Income Account field and choose the Account created in Step 1 above from the drop-down menu.
5. Hit the Save and Close icons.

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

1. Click + New.
2. Select Sales Receipt.
3. After this, choose the Customer Name, Payment Date and the Bank Account the money was received into.
4. Under the PRODUCT/SERVICE field, click on the Prepayments account created in Step 2 above.
5. Enter the Amount received in the Amount column.
6. Now, choose the VAT Code, press Save, and close.
7. Repeat steps 3a-3e for subsequent payments made in advance of the Invoice being raised.

Enter the Invoice to ensure the prepayments are taken into Account

1. Select + New.
2. Click on Invoice.
3. Write down Customer details as normal, with line items detailing the Services provided, and select the relevant VAT code(s).
4. On the last line item, choose the Customer prepayments item created in Step 2 above.
5. Type the amount of prepayments as a Negative value and then click on 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 before, as it ensures VAT isn’t counted twice.

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

1. Find and open the Invoice.
2. Press the Receive payment button at the top right-hand corner.
3. Enter the amount being paid in the Amount box.
4. Click on the Save and Close tabs.

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

1. Navigate to Transactions and select Chart of Accounts. 
2. Locate the Customer Prepayments account.
3. Under the Actions column to the right-hand side, choose the drop-down next to Account history and then click on Run Report.
4. After this, hit the Report period drop-down menu and then select the required date range.
5. If you have all Customer prepayments going to the same Account, click the Group by drop-down and press Name.
6. Choose to Run Report at the end.

How to Set up, Record, and Manage Customer Prepayments in QuickBooks Desktop?

Customer prepayments, also known as customer deposits, are payments you receive from a customer before an invoice is created and the product or service is delivered.

Important: You can manage and use customer prepayments in QuickBooks Enterprise 24.0 or later.

Requirements to use Prepayments

Prepayments

• It can only be used with sales orders and estimates
• It can be used with Progress and Non-Progress estimates
• Can’t be edited once they’re applied to invoices
• Can’t be used with multi-currency turned on

Note: If you use Prepayments and then turn multi-currency on, Prepayments will be turned off.

Turn on ‌Prepayments

1. Hover over the Edit menu, and then select Preferences.
2. Choose Payments and then Company Preferences.
3. Move to Prepayments and then click on Prepayment Settings.
4. Press Turn On Prepayments.
5. Moving towards the Current Liability account, then select an esxGo to Current Liability Account and opt for a current liability account or click to create a new one.
6. Once done, press OK and then hit the OK tab once again in preferences.

Receive Prepayments on a Sales Order or Estimate

It is important to create and save a new sales order or open any existing sales order.

Note: If you don’t have sales orders turned on in your company file, you’ll have to enable it first.

1. Create a new existing sales order or estimate or open an existing one.
2. Now, click on Receive Payments.

• Choose Prepayment on Sales Order or Prepayment on Estimate.
• Also, open Receive Payments from the home page or the Customer Center. 
• Select Prepayment on Sales Order or Prepayment on Estimate, then the sales order(s)/estimate(s) to receive the prepayments.

3. Enter the amount and other details for the prepayment, and then hit the Save and Close icons.
4. Then, you’ll see the amount entered for PREPAYMENT APPLIED.

Print a Sales Order or Estimate that shows a Prepayment Received

1. Open the sales order or estimate, then click Formatting.
2. Choose Customize Data Layout and then Footer.
3. Now, select Prepayments and Balance Due.  

Note: You can opt for Layout Designer to adjust the position of these fields under the print template.

4. Press OK and click Print. 

Apply a Prepayment Credit to an Invoice

1. Go to the sales order or estimate and then choose Create Invoice.
2. Press Save this invoice, and then Yes to apply for prepayment credits.

Note: you can also click Apply for credits on an invoice to apply for prepayment credits.

3. Select the prepayment credit and enter or edit the credit amount to apply to this Invoice. Then hit the Done tab.

How QuickBooks Applies Prepayment Credits?

QuickBooks creates two general journal entries for each prepayment credit when you apply it to an invoice.

To view these entries in QuickBooks, navigate to the Customer Center and locate the Customer/Job to which you applied a Prepayment credit to an invoice.

Below are both the general journal entries listed for each prepayment credit:

• The first general journal entry ‌is mapped to a liability account with a positive amount.
• The second general journal entry is mapped to an A/R account with a negative amount.

Note: The Account for Prepayment Transfer in both general journal entries is an inactive account that QuickBooks creates. QuickBooks uses it to transfer an amount from a liability account to an A/R account.

Run Reports to see Open Prepayments on Sales Orders or Estimates

There are two reports you can run to see open prepayments and open prepayment balances: the Open Prepayments by Customer and the Open Sales Order by Customer reports. Here’s how to run and customize them.

Open Prepayments by Customer Report

This report allows you to access all open prepayments you’ve received that you haven’t applied to an invoice.

1. Move to Reports.
2. Click on Customers & Receivables. 
3. Then, select Open Prepayments by Customer.

You can customize this report to include prepayments that have been fully applied to invoices.

1. Choose Customize Report, then Filters.
2. After this, select Prepayment Balance, then Either, and press OK.

Open Sales Order by Customer Report

1. Head to Reports and then Sales.
2. Choose Open Sales Order by Customer Report.

The Prepayment Open Balance has been added to this report. You can customize this report to show open estimates and sales orders.

1. Click on Customize Report, then Filters.
2. Select TransactionType, then Multiple Transaction Types.
3. After this, choose Estimate and Sales Order, then press OK.
4. Hit the OK tab again.

The report will update to display both open sales orders and estimates with their open prepayment balances.

Edit a Prepayment

You can edit a Prepayment if it hasn’t been applied to an invoice. But once it’s been applied to an invoice, you’ll have to delete the prepayment (this will also delete the two linked general journal entries) and then create a new Prepayment.

Refund a Prepayment

Prepayments, like other customer payments, can be refunded. If the payment hasn’t been deposited to your bank, you can delete the prepayment and the sales entries it’s applied to (sales order, estimate, and invoice). However, if the prepayment has been deposited to your back, you can either create a credit memo and apply it to another invoice or write a check to the customer.

Record Customer Prepayments in QuickBooks with a Customer Liability Account!

To track the amount of the retainer you received from your customer, you are recommended to create a liability account.

Let’s see how:

1. Navigate to the Gear icon at the top.
2. Select the Chart of Accounts under Your Company.
3. Click New from the menu.
4. From the Account Type drop-down, choose Other Current Liabilities.
5. After this, click on Trust Accounts – Liabilities under the Detail Type drop-down menu.
6. Enter the Account’s name or leave the account name as it is.
7. Hit the Save and Close tabs.

Then, create a retainer item you can use to receive the Deposit or retainer from your customer. Adhere to the following steps:

1. Move to the Gear icon at the top.
2. Select Products and Services under Lists.
3. Now, click New.
4. On the Product/Service information window, choose the Service option.
5. Type a name for the product or service item.
6. Choose Trust Liability Account from the Income Account drop-down.
7. Press Save and Close.

Manually Record Customer Prepayments in QuickBooks!

The option to automatically process a prepayment in QuickBooks Online is currently not available. Thus, you need to manually enter the customer payments.

To start with, create an account to post the deposit you receive from your customer.

Here’s how:

1. Navigate to Accounting on the left panel, and then choose a Chart of Accounts.
2. Press New at the top.
3. Select Other Current Liabilities under the Account Type drop-down menu.
4. Under the Detail Type drop-down, click on the account type you wish to create.
5. Enter Customer deposit in the Name field.
6. Fill out the field boxes and hit the Save and Close icons.

After this, create the item you use to invoice customers for the deposits. To add a Service item, do the following:

1. Head to the Gear icon at the top, and then choose Products and Services.
2. Press New.
3. Then select Service from the Products and Services window.
4. Add the service item.
5. In the Income Account drop-down menu, select Trust Liability Account.
6. Fill out the field boxes. 
7. Click on Save and Close.

Record Upfront Customer Deposits in QuickBooks!

You’re recommended to set up and use an item which has a liability account on it to hold customer deposits. Yes, it’s also a liability since you received the prepayment before providing the services. This way, although your business is holding the deposits, no sales income is posted until it’s applied.

Once you open the liability account you’ve created, do you only see A/R? With this, let’s make sure you’ve set them up correctly, as well as the Receive payment.

So, let’s record the upfront deposits you received from your customer.

Follow the steps below:

1. Choose Enter Sales Receipts from the Customers menu.
2. From the Customer:Job drop-down list, click on the customer or job.
3. If the Deposit To field starts appearing, select the Account into which to deposit the funds.
4. However, if this field does not appear, the funds are identified as Undeposited Funds and can be deposited at a later point.
5. Select the Payment method.
6. After this, enter relevant information, such as the Date and Sale No, in the appropriate fields.
7. Under the Detail section, choose the Upfront Deposit item you created from the Item drop-down list.
8. Type the amount of the Deposit or retainer into the Amount field.
9. Press Save and Close.

To record the Payment as a Deposit, here’s how:

1. Click +(plus) icon.
2. Select Bank Deposit.
3. Once done, choose Accounts Receivable under Account to enter Bank Deposit. 
4. Hit the Save and Close tabs.

Bottom Line!

Thus, Customer Prepayments (Customer Deposits) are used when you receive a payment from a customer, but there is no invoice that the payment can be settled against. These types of payments help you to manage accurate financial records and ensure that your company’s cash flow is effectively monitored.