QuickBooks Small Business

How to Handle Customer Prepayments in QuickBooks

Written by Carrie Kahn

As a QuickBooks consultant, we often have to figure out workflows for unusual situations involving prepayments from customers — including how to handle customer prepayments in QuickBooks. For customers that are new to the business, they may have to prepay for inventory that they have not received. It’s important to manage the workflow so that the accounts receivable and the profit and loss reports are accurate.

Carrie Kahn will be presenting at Accountex 2018 in Boston, August 22-23. Click on this link for a complete list of conference speakers.

In order to track these prepayments, you need to create an account called “Prepaid Customers.” This would be a current liability account. When you make a deposit for the prepayments, you will deposit it straight to this new account and code this to “Prepaid Customers.”

Then you will go into Customer>Create Credit Memo Refund. Create a Credit Memo (opposite of an Invoice) to the customer for the same amount as your check. You will need to create an item code that points back to this same chart of account — “Prepaid Customers.”

Then create the credit memo using this item code:

If this is done correctly, your “Prepaid Customer” account will now be -0-.

Also, your Open Accounts Receivable will have a credit balance on it.

Now your prepayment is appropriately reflected. Typically, the inventory is ordered with the prepayment, and there will be a time lapse before the inventory is received.

Inventory is received, and ready to be invoiced to the client. (We are not going through the vendor/bill steps).

Next step is the invoice needs to be entered. Click Customer > Enter Invoice.

After this invoice is created, we need to apply our prepayment. QuickBooks will recognize there is a prepayment, or you can select the button at the top to apply credits.

After you select the correct prepayment entry, click done. 

When everything is applied properly, your accounts receivable will look like this:

These examples were displayed in QuickBooks Desktop edition as this is the version we recommend for tracking inventory. You can continue to add more of a prepayment to your customer and keep a running balance of available credit to apply to their purchases. In this example, the amount of the prepayment was a different amount from the inventory purchased. If they were the same amounts, then your accounts receivable would be zero.

If you love QuickBooks and want to learn more about the advantages, meet me at Accountex this year. I will be discussing the power of partnering to demystify all of the options in QuickBooks and make it easier to understand. I love to talk about QuickBooks Desktop, so stop by and check out my demo presentation.

About the author

Carrie Kahn

Complete Business Group helps small businesses purchase the RIGHT QuickBooks product at the lowest price and offers a team of experts to provide high level customer service so that they use QuickBooks® the way it was intended. With the many offerings from online to desktop we understand the benefits and limitations of each option to help you find the right solution. We have a team of certified ProAdvisors located all over the US ready to support you remotely or locally.

Carrie Kahn, CPA, the founder and CEO of Complete Business Group, has been helping small businesses purchase the RIGHT QuickBooks product at the best price and offers a team of experts to provide high level customer service so that they use QuickBooks®the way it was intended.

Carrie has been supporting and selling QuickBooks since Dos V1. She has been an Advanced Certified ProAdvisor since 2002. She joined the Intuit Reseller Program in 2008. In 2015 she launched the Complete Business Partner Program
mentoring ProAdvisors in selecting the best QuickBooks products for their clients at best pricing for their customers. She is very involved in the QuickBooks community providing extensive resources for ABBO Facebook group , Scaling New Heights, School of Bookkeeping, CPA Academy, Intuit’s Firm of the Future, and CBG Blog. Carrie is a lead QuickBooks Author for the Accountex blog. She was named Insightful Accountant’s Top 100 ProAdvisor every year since 2014 and was Insightful Accountant’s 2017 Social Media Resources ProAdvisor. She currently serves on the Intuit Reseller Program Council. CBG has been in the top 10 Intuit Premier Resellers (IRPs) since 2012 and currently is ranked #1 in the East. She is currently serving on the IRP Council. Carrie’s company, CBG was named Partner Program of the year for 2017.

8 Comments

  • Warning! This is does not address sales tax issues when you are on a Cash-Basis reporting set up with the State of Arizona.

    • This workflow makes the sales tax tracking clean.

      The invoice is created for the customer when the product(s) are received and sales tax is charged if applicable.

      Sales tax is not charged when the customer makes a down payment on the order.

      Cash/Accrual basis for sales tax is not affected by this workflow. This is a report setting based on when the client pays and when the business needs to pay in the sales tax.

    • Hi, Carrie, nicely done!
      I can see how this method is an improvement over using Receive Payment for a cash basis customer, because the unused portion of the Credit Memo will reverse with the Accrual to Cash reporting switch. I’m curious though about keeping the credit balance in the AR as opposed to maintaining it in the Customer Prepayments account and using a negative entry on the invoice to reflect the prepayment. What do you see as the advantage of one method over the other?

Leave a Comment