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 A/R is $75,000, and you enter a $10,000 deposit your A/R account would show $65,000.  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 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.

For those of you who offer customers a discounted rate for paying for your work for the season up front, the complaint I hear from business owners is they see this huge number in the early season for income, which really does not reflect the work they’ve done. And in the remaining months of the season or project, your income is understated and can even show a loss for the business which really isn’t true.

I’ve also seen some record the deposit correctly, and then when they invoice, they enter the prepayment on the invoice.  In fact, I used to do to this. 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. It may also confuse your customers if you send them a statement.  I found I wanted to see an actual invoice with an amount and then a payment applied separately.

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, you don’t overstate your income, and both you and your customer 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

Screen Shot 2015-03-24 at 11.00.38 AM

  • 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 product
  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 the payment against the invoice – this will show in your customer deposit “other liability” account on your balance sheet.

Applying Prepayment to an invoice

  1. Create an 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 you are applying to the invoice
    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.
    4. FYI, if you customize the footer of your invoice to show payment applied, if you choose to send this invoice to your customer, they will see the amount of their prepayment that is applied to the invoice.

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-Zero2
    2. On the Filters tab, click on Account, then select your Deposit/Prepayment liability account

Screen Shot 2015-03-24 at 11.06.13 AM

 

  1. If you intend to use this report frequently, click on the Header/Footer tab and name your report.
  2. Run the report and then memorize

Screen Shot 2015-03-24 at 11.08.00 AM

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
        Screen Shot 2015-03-24 at 11.16.09 AM
      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.

Screen Shot 2015-03-24 at 3.59.39 PM

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.

 

 

 

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One Response to Working with Customer Prepayments

  1. Sue says:

    I read your post “Working with Customer Prepayments” but it looks like this is for accrual accounting. I recently started taking prepaid consulting clients but can’t figure out the bookkeeping for CASH based accounting.

    Customer prepays me for 1-2 hours of consulting work. (I don’t like taking money for more than the amount of work I would do for them in a month.)
    I work using the Quickbooks timer to keep track of my time.

    I need to be able to run a report that shows how much of their prepayment is left or if I went over the hours and they owe me money.

    The first thing I did was create a deposit then invoice with the timings and apply the credit. But once I took prepayments from 4 clients for varying amounts over the past month, my AR was a mess.

    An accountant told me to invoice for the prepayment, then just add my timings as notes on lines on the invoice. That might work if I have one or two clients, but if I have many, I’m not going to be able to remember who paid and for what, or be able to find their invoices when they start paying for additional hours. And what happens when I go over 15 minutes of what they paid?

    Is there some way to do this with estimates and progress invoices? (Which I do use and have set up in QB Pro)

    I want to be able to take prepayments without it becoming a logistical nightmare with my cash accounting. I’ve tried billing after the work is done but I’m sick of not getting paid for weeks, months, or never.

    Thanks!

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