If you work with clients on an ongoing basis, or if you're beginning a large project, you may want to accept a deposit or prepayment from your customer. We'll walk you through how you can handle this type of arrangement, and similar transactions.
How to account for receiving deposits or prepayments
The first step is to create your customer prepayment account:
- From the left navigation menu, select Accounting > Chart of Accounts.
- At the top of the page, select the Liabilities and Credit Cards tab.
- Scroll down to Customer Prepayments and Customer Credits, and click Add a new account.
- Fill in the account details, then click Save.
You have two options here; you can create a single Customer Prepayments and Customer Credits account to categorize all deposits you receive from customers. Or, you can create a Customer Prepayments and Customer Credits account for each customer, and use these accounts to categorize the deposits that you receive.
Next, we’ll use the new Customer Prepayments and Customer Credits account as the category for your deposit transaction:
- Head to Accounting > Transactions.
- Find the deposit (income transaction), and categorize it to your newly created Customer Prepayments and Customer Credits account. This will increase the prepayment account by the amount of the deposit.
If you chose to create a single Customer Prepayments and Customer Credits account, you can add a customer to the transaction, to indicate which customer this deposit is coming from. To add a customer:
- Click the dropdown arrow on the far right of the deposit transaction, and select Edit more details.
- Click Add customer.
- Choose a customer from the dropdown menu.
- Click Save.
How to record a prepayment on a future invoice
Follow these steps when you’re ready to record the prepayment against an invoice:
- Head to Sales > Invoices.
- Select Record a payment next to your customer's invoice.
- For the Payment method, choose Other.
- For the Payment account, choose the Customer Prepayments and Customer Credits account you created.
This method allows you to reduce the prepayment account as you clear your receivables.
Customers may choose to pay only part of the total invoice amount. You can include payment terms in the Notes field when you create an invoice, indicating to your customer that they should pay a certain amount by a particular date, and the remainder by the due date.
If an invoice is not paid in full by the due date, its status will change from Partial to Overdue.
Recording a partial payment is much like recording a full payment. You can find the steps to record an invoice payment in this Help Center article. The only difference is that your invoice won’t be marked as Paid, as there will be a balance remaining.
If you are accepting multiple payments or instalments for your invoices, you may want to create a recurring invoice instead. If you want to accept multiple payments on one regular invoice, you can-it's up to you. However, with a recurring invoice, there is no searching through past payments on a single invoice; there's one payment per invoice, which makes tracking easier.