Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15
Chapter 16
Chapter 17
Chapter 18
Chapter 19
Chapter 20
Chapter 21
Chapter 22
Chapter 23
Chapter 24
Chapter 25
Chapter 26
Chapter 27
Chapter 28

Chapter 8

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Advance Payments

Money received before it is earned may XE "Advance Payments"  go under various names, such as prepayments XE "prepayments" , unearned income XE "unearned income" , retainers XE "retainers" , or deposits XE "deposits:from customers" .  (Within QuickBooks, deposits refers only to money you put in the bank.)  There are several options for handling prepayments, with one thing in common:  receipt of prepayments does not affect income or net worth. Income will be counted only when an invoice records the fact that you have delivered value to the customer and earned the money.

Possession of the customers money means that you have a debt, and QuickBooks provides two ways to record it.  The debt can be recorded with a credit memo, and shown as a negative amount in Receivables, or it can be placed in a current liability. The liability account is a cleaner accounting method.  The negative amount in Receivables is simpler, and may be used when only a little money is involved.

Lawyers: this is not a lawyer joke.  The methods in this chapter do not apply to the custody of client funds XE "client funds" .  With versions 4.0 or later, click (in the menu bar) Help|QuickBooks and Your Industry|Legal Firms.  Then you can print out 31 pages of text especially for you, including good information about client fund handling, and financial accounting.

Liability method requires an account of type Other Current Liability, like Retainers or Prepayments.  (As explained above, Deposit invites confusion.)  The money goes into the liability, because you have effectively borrowed it from a customer.  When you earn the money and invoice the customer, the debt is dissolved by paying the invoice.  Each activity requires two invoices, each of which adds up to zero!  An obstacle must be dodged, requiring a devious procedure. Please read the whole thing before starting.

Setting up the liability method:

  1. Set up the account, using Lists|Chart of Accounts|New and select the type Other Current Asset.  The deposit should go to a liability account, but that comes later.  The name will be Customer Prepayments, or something of your choice (unless your accountant is particular.)
  2. Set up an item.  The type will probably an Other Charge, and the name will be a short form of what you call this type of transaction, like Prepmt. The description will be what you want your customer to see, but read the instructions below.  The account, of course, is the Customer Prepayments asset set up above.  This item will not be taxable.
  3. Set up another item, unless you already have it.  The type must be Payment, the name could be Paymt Chk  and the description Payment by check received.  (Credit cards could require more payment items.)  The account is critical.  The payment goes either into a bank account, or into Undeposited Funds, depending on how you handle receipts.
  4. Set up an additional payment item, to be called  Prepmnt appld.  The account for this payment item will be the Customer Prepayments set up in step 1. The description will inform your customers that this invoice has been paid from the previous deposit.  The reason for this whole backwards procedure is right here.  Customer Prepayments was set up as an other asset account, because deposit items can be created only going to certain asset accounts. 
  5. Open the Chart of Accounts again, and edit the Customer Prepayments account.  Change the type to be Other Current Liability.  Now the trick is done.  A payment item is connected to a liability account, as is the Prepmt item set up in step 2.

Using the liability method:

  1. When the pre-payment is received, write an invoice to the customer, naming the Prepmt and Pmt by check items as set up in steps 2 and 3 above.  The same amount will be entered for each, but the payment amount will grow a minus sign, resulting in a zero balance due on the invoice.
  2. When the work is done, write another invoice, the first item being the usual business line item, for the services performed or other value delivered.  It may be taxable.  The other item will be the Prepmnt appld item.  As a payment, the amount will become negative.  This reduces the liability account, applying it against the value delivered to the customer.  If the deposit covered the entire job, the invoice will show a zero balance due.  If not, the invoice will show the customer the amount still owed.

Statement billing (Chapter 7) handles prepayments quite well.  The same items are used as for invoicing.

For the credit memo method, the simplest way begins with Receive Payments.  Select the customers name, and show the amount paid.  Click Clear Payments, if necessary, and the entire amount will be shown as unapplied. The credit memo may be printed, if desired.  Then, click OK to record.

When the work is done, invoice the customer.  If a final payment is required, send the customer an invoice and a statement.

To close the matter, open Prepayments and select the customer.  If a final payment was received, show it as Amount.   The advance payment is not directly visible here, but is brought in by clicking Apply Existing Credits.   The invoice will then show a balance due of zero.  When the facts are show correctly, click OK.

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Last modified: May 21, 2004