How to Record Advance Payment in QuickBooks?

QuickBooks provides several facilities to manage transactions in businesses. Among the facilities is advance payment recording of the products and services. It ensures that the transactions made in businesses end up forming good client-supplier relationships.

This article includes the meaning and importance of advance payment in QuickBooks. It also details its benefits and drawbacks with the methods to record advance payments for each business agent.

What is Advance Payment in QuickBooks?

As the name suggests, advance payment is a transaction made before a customer receives the service or product. These payments may include deposits, full lump sum, or partial payment. For instance, partial payments based on the progress of a work is a type of advance payment.

In simple terms, advance payment is a risk-reducing method that enables companies to have the working capital they require upfront.

What Are the Reasons for Charging Advance Payments?

The reasons for charging an advance payment could be many. Some are:

• Acting as an insurance for large orders.
• Covering expenses and cost of materials needed for a large project.
• Reducing the risk of non-payment after a product or service is received.
• The customer requests to pay beforehand so that the transaction can be included in the same year’s tax.
• Allowing customers to pre-book goods or services.

How Do Advance Payment in QuickBooks Work?

Estimating the budget for purchased goods and services is essential to collect advance payment. The process is significant because it reduces the risk of surcharging and problems of reimbursement or refund.

Once you send the invoice for the product or service and receive the payment from the customer, you must record the transactions made.

What Are the Advantages and Disadvantages of Advance Payments?

Even though a prior payment seems like a benefit, it displays both advantages and disadvantages.

Some advantages of advance billing are:

• Reduced risk of losing money due to upfront financial support.
• The revenue and expenses are accounted for in the same tax period.
• The essentiality of pursuing collections is limited.
• Maintenance of a constant cash flow is simpler.
• The process of creating automated invoices becomes simplified.

Now, let us check the cons that come with advance payment. These are:

• Lack of trust from new customers resulting in hesitation to pay in advance.
• Changes in project scope can lead to create new invoices.
• Refund processes can be highly complex.

How Can You Record Advance Payments in QuickBooks Online?

You need to know that an advanced payment from a client is considered a liability. Therefore, you need to transfer the amount from the cash account to your liability account. Once the work is done, you will complete the revenue recognition where you need to transfer the entire received amount from the liability account to the revenue account.

To do this, consider following the below steps.

Step 1: Transferring the Amount to the Liability Account

• Head to Chart of Accounts and enter a new entry.
• Choose New, then Account Type followed by Current Liabilities from the drop-down menu.
• Now, select the Trust Account – Liabilities from the drop-down menu again.
• Input a name for the account and then press Save.

Step 2: Transmitting the Prepayment from the Cash Account

• Include a new entry under the Products and Services option.
• Click on New and then Service from the panel of Product or Service information.
• Input the name of the product or service that will be provided.
• From the Income account drop-down menu, choose the Trust Liability Account, and click on Save.

Step 3: Form an Invoice for the Prepayment

Note: You can also create a cash memo instead of creating an invoice.

• Choose Invoice.
• From the list under the drop-down menu, select the customer.
• Select the product or service that you set up in the Product or Service panel in step 2.
• In the Rate or Amount column, enter the amount received and press Save.

Step 4: Transferring the Prepayments to Income

• Press New and then Transfer.
• As created in step 2, from the Transfer Fund drop-down menu, choose the trust liability account.
• Now, Select the operating bank account from the Transfer Fund list.
• Input the advanced payment amount that is now considered revenue, and hit the Save button.

Note: This income will not be recognized unless you complete the services or deliver the products.

Another process is shown below.

For Customers

Make sure that you have enlisted the customer in QB Online. If not, follow below:

• Visit the Sales menu and click on Customers.
• Create a new customer and fill out the necessary details. Now, click on Save.
• Press +New.
• Now press Receive Payment.
• Select the customer using the dropdown arrow and form a receipt payment.
• Visit the Account column and select the invoice.
• Input the amount received, and click on Save and New.

For Suppliers

Same as the customers, you must enlist the suppliers you want to pay in advance in QuickBooks Online.

• Choose Expenses and then select Suppliers.
• Fill out all the needed information and form a new supplier. Click on Save.
• Click on +New.
• Choose Expense.
• Now, select a Payee and Payment Account to create an expense for the Supplier.
• Head to the Category column and choose the Account Payable (A/P) option. Input the required description and the amount needed to be paid.
• Hit the Save and Close button.

For Vendors

Follow the same instructions as the steps shown for paying suppliers in advance.

How to Record Advance Payments in QuickBooks Desktop?

In the case of QuickBooks Desktop, the process of recording the advance payment is a bit different from QB Online.

For Customers

Step 1: Creating a Current Liability Account to take note of the Advanced Payments.

• Head to the Transactions and choose the Chart of Accounts.
• Under the same menu, click the New option.
• Select Account Type and from the drop-down menu choose Current Liabilities.
• Now, from the drop-down menu of Detail Type, select Current Liabilities again.
• Input a name for the account and press OK.
• Hit the Save and Close button once you are done.

Step 2: Creating a Service item related to the Account Made

• Hit the gear icon and choose the Products and Services option.
• Press on the New option, and choose Service.
• Input a name and go to the Income Account field.
• There, Select the account created in First Step from the drop-down list.
• Press Save and close.

Step 3: Inputting Sales Receipts for Every Prepayment of the Invoice and Posting it to the New Service item.

• Head to the New button and choose Sales Receipt.
• Choose the Payment date, Customer name, and the Bank account where the money was received.
• Select the prepayment accounts created in Second Step in the Product or Service field.
• Enter the amount received under the Amount field and select the VAT code.
• Now, click Save and close.
• Repeat steps 1-5 to raise the advance payments of the invoice.

Step 4: Entering the Invoice to Track Prepayments.

• Press New and then Invoice.
• Input the Customer details, then line items in the Service items section, and finally select the VAT code(s).
• Choose the customer prepayment items created in Second Step on the last line item.
• Make sure that the prepayment amount is entered as a negative value (so that the VAT is not doubly counted)
• Now, Press the VAT code used in the Third Step.

Note: Remember that the VAT should be entered with a negative value to avoid double counting. It will keep your calculations accurate.

Step 5: Paying the Invoice Balance, if any.

• Search and open the Invoice.
• Select the Receive Payment option in the top right-hand corner.
• Fill the Amount box with the amount being paid.
• Press Save and Close.

For Suppliers

There are two options to record supplier prepayment.

Option 1: Using Accounts Payable to Record Advance Payments

To decrease your balance, you need to write a check to the supplier and enter it into your Accounts Payable.

Step 1: Creating a Check for the Supplier

• Head to the Banking tab and select the Write Checks option.
• Fill the supplier’s name, payment amount, and date in the respective fields.
• Visit the Expenses tab and enter Account Payable under the Account column.
• In the Customer column, go to the Job option, and from the drop-down list, choose the supplier.
• Hit the Save and Close option.

Step 2: Entering the Bill

• Visit the Suppliers tab and choose Enter Bills (you can also select Received Items if you want to record the bill later).
• Enter the essential details and once done, press Save and close.

Step 3: Applying the Advance Payment to a Bill.

• Now, Go to the Suppliers tab and select the Pay Bills option.
• Highlight the bill you want to connect with the advance payment.
• Click on the Set Credits option.
• Check whether the advance payment is shown in the Set Credits screen. If it is there, press Done.

Note: In case of a due balance on the bill, QB will form a Bill Payment Check.

Option 2: Using an Asset Account to Check the Advance Payment.

You can increase the balance by writing a check to the supplier and recording it to an OCA (Other Current Asset).

Step 1: Creating an Chart of Account to trace Advance Payments.

• Visit the Lists tab and choose the Chart of Accounts.
• Under it, Press New after right-clicking anywhere.
• Select Other Account Asset from the Other Accounts Type drop-down menu.
• Press Continue.
• Input Prepaid Stock as the Account Name, and click Save and Close.

Step 2: Writing a Check to the Supplier.

• Follow the steps from option 1’s steps 1-3 from the First Step.
• In the Account column, choose an COA account in place of Account Payable.
• Once done, click on Save and close.

Step 3: Entering the Bill After the Items are Received.

• Visit the Suppliers menu and select Enter Bills.
• Head to the Expenses tab and select the OCA account.
• Enter the advance payment amount as a negative value.
• Under the Items tab, input all items and select Save and Close.

Note: This will cause the deduction of the advance payment and the bill will equalize the balance owed. This will also reduce the asset account.

Step 4: Paying the Balance of the Bill.

• Visit the Suppliers menu and choose Pay Bills
• Choose Pay Selected Bills after selecting the entered bill. QB will now create a Bill Payment Check for the balance.

For Vendors

The options and the process for vendors are the same as the suppliers.

However, in the case of vendors, go to the Vendors menu in place of the Suppliers menu in Option 1 (Second and Third Steps) and Option 2 (Third and Fourth Steps).

Final Words

The inclusion of a prepayment system in QuickBooks helps companies to manage their budget. It ensures that they deliver the best services while maintaining their upfront expenses. However, despite its benefits, it is recommended to consult with an accounting expert regarding the requirements of this process for your business.

You can find every detail of recording advance payment in both QuickBooks Online and QuickBooks Desktop. But if you have any doubts regarding these, feel free to contact our Dancing Numbers professionals who will help you carry on with your work.

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Frequently Asked Questions

Q1. What are the Alternatives to the Advance Payment in QuickBooks?

Ans: An alternative to advance payment is deferred payment (or billing in arrears). Deferred payment is the transaction made by customers after they receive the service or product.

The invoice is based on actual costs, customers are more comfortable with the payment system, and there are fewer cases of refunds.

However, you will not get any payments until the service or product is received. Also, separate invoices should be required for additional changes in a project. Forming a client relationship is therefore significant for billing in arrears method.

Q2. What are the Best Practices for Advance Payment in QuickBooks?

Ans: Some best practices for advance payment in QB are as follows:

• Considering whether prepayment is the best option for certain customers and services.
• Managing invoices via online invoicing software like QB that helps in creating, sending, and tracking invoices.
• Allowing online invoice payments using QB Payments. It ensures that the invoice is automatically added to your books once a pay-enabled online invoice is paid.
• Paying attention to the accounting process to ensure correct attribution of revenue from the prepayments.
• Replacing reverse entry to account pre-paid transaction with advance payments to revenue.