Working with Customer Prepayments

Do you take deposits up front from clients? Whether you’re in the construction industry, landscaping, trades or some other type of business, deposits up front help cash flow and enable you to pay employees and purchase materials for the job.  How they can be recorded in QuickBooks varies.

Many simply use Receive Payments to record the deposit.  Unfortunately, this understates your Accounts Receivable. So, if your true outstanding invoices is $40,000, and you enter $5,000 deposit your A/R account would show $35,000.  With a short time frame and few invoices, you can do the math in your head, but I don’t recommend this as an ongoing method, even though it’s really simple.  From an accounting point of view, your balance sheet would be incorrect – definitely not something you could show a bank or investor.

Another method is to use the Progress Invoicing and invoice for the payment, so at least your receivables is correct. However, this shows income before you’ve done the work, so it’s still technically inaccurate.

I’ve also seen some record the deposit correctly, and then when they invoice, they enter the prepayment on the invoice.  In many cases, the resulting amount due is $0, but that’s also what the invoice shows. So when you’re reviewing invoices, you don’t get to see the original amount and then the payment unless you actually open the invoice to see the detail.

The method I prefer is to invoice for the deposit, then invoice as you do the work, and use a credit memo to apply the deposit/prepayment to the invoice. That way the accounting is correct and you can easily follow the invoicing and payments.  (For those of you who file taxes on a cash basis, you will need to make an adjustment at year-end to show the money you actually received, which is not shown in this article.)

One-time Setup

  • Create an Other Current Liability Account for deposits (e.g. Unearned Income, Customer Deposits, Prepayments, Retainers)
    • List>Chart Of Accounts>New>Other Current Liability
  • Create an Item for Prepayments/Deposits
    1. Click on List > Item > New Item
    2. Type
      1. Service if upfront deposit or retainer for services
      2. Other Charge if up front deposit is for products
    3. Item Name – Prepayment or Upfront deposit… your choice
    4. Account is the Other Current Liability account created above

Handling Prepayment/Deposit

Record upfront deposit

  1. Create an Invoice for the job using the prepayment Item; you may want to use the memo at the bottom of the Invoice to make note of the deposit as well for reporting purposes
  2. Receive payment against the invoice – this will show in your customer deposit account on your balance sheet.

Applying Prepayment to an invoice

  1. Create the invoice for the work being done (this may be a progress invoice if you created an estimate or sales order)
  2. Create a Credit Memo (Customer>Create Credit Memo)
    1. Use your prepayment Item and enter the amount
    2. When saving the credit memo, you’ll be asked if you would like to apply this to an invoice – say yes. If the customer has multiple invoices, be sure you select the correct invoice.
    3. On the memo line at the bottom of the credit memo, I like to make note of the invoice it’s paying – easier to follow in reports and statements.

Prepayment Reports

For a Summary Report of Customer deposits/prepayments:

  1. Click on Reports> Customers & Receivables > Customer Balance Summary
  2. Click Customize Report
    1. On the Display tab, click on Advanced Options and select Rows = Non-Zero
    2. On the Filters tab, click on Account, then select your Deposit/Prepayment liability account
  3. If you intend to use this frequently, click on the Header/Footer tab and name your report.
  4. Run the report and then memorize

For a Detail Report of Customer deposits (this is what I use),

  1. Click on Reports> Customers & Receivables > Customer Balance Detail
  2. Click Customize Report
    1. On the Display tab,
      1. Deselect Account
      2. Click on Debit and Credit
    2. On the Filters tab, click on Account, then select your Deposit/Prepayment liability account
  3. If you intend to use this frequently, click on the Header/Footer tab and name your report.
  4. Run the report and then memorize

You will see the original deposit and then the drawdown of the deposit.

If prepayments are common for your business, then periodically you will want to reconcile the deposit/prepayment account to clear out finished projects so they don’t stay in your reports, but that’s for another day.

Contact our office if you have any questions or need assistance.

This entry was posted in Business Finance, Cash Flow, Job Costing, QuickBooks and tagged , , , , , , . Bookmark the permalink.

2 Responses to Working with Customer Prepayments

  1. Driven says:

    If I record the pre-payment as a sales receipt can I still continue with the “create credit memo” and applying payments that way? I’ve had “$0” invoices until now and I prefer the way you’ve described above using memo’s if it will work for my previously received pre-payments.

    Thank you! Helpful article!

  2. Yes, you can enter the prepayment using a sales receipt. The important thing is that your Item posts to the balance sheet (other current liability). I have personally found this system to be much easier to track.

Leave a Reply

Your email address will not be published. Required fields are marked *