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nick25
Feb 11, 2021 12:37 PM UTC
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Hello, we handle customer prepayments incorrectly-our A/R often shows a (-) balance. What's the best way to treat prepaid income (liability), before a sale is completed?

... and through the final posting of the Sales invoice.
Rustler
RustlerAnswer
Feb 11, 2021 12:57 PM UTC

Create a liability account called deposits

create a service type item that is linked to that deposits account called custdep

use that item on a sales receipt when the deposit is received

on the invoice, list the items being sold, list the custdep item, qty is negative one, and the amount of the deposit.  The customer pays the balance due

 

calling it prepaid income is a problem in an audit, call it a deposit.  Pre-paid income is taxable as of the date it is received in both accrual or cash based accounting

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4 replies

Rustler
RustlerAnswer
Feb 11, 2021 12:57 PM UTC

Create a liability account called deposits

create a service type item that is linked to that deposits account called custdep

use that item on a sales receipt when the deposit is received

on the invoice, list the items being sold, list the custdep item, qty is negative one, and the amount of the deposit.  The customer pays the balance due

 

calling it prepaid income is a problem in an audit, call it a deposit.  Pre-paid income is taxable as of the date it is received in both accrual or cash based accounting

nick25Author
Feb 11, 2021 1:16 PM UTC

Thank you Rustler, for good advice to avoid calling a deposit prepaid income.  In fact, our procedure is to issue a proforma invoice, get the advance payment, and then once we ship the order, post the final invoice.  So we get the money in and post it to Deposits (a liability account). Please forgive my ignorance, but what is the correct way then to post the invoice and clear the Deposit account - can that be automatic, or is all of this via journal entry?  Grateful for your help!

nick25Author
Feb 12, 2021 8:39 PM UTC

Again, I thank Rustler for his very helpful advice.  However, I think I framed my question poorly, for which I apologize.  Here is a better description of our problem, and our procedure which causes it:  We sell $8,000 radon instruments.  We issue an offline proforma invoice to the customer, before we ship.  In QuickBooks, we post the receipt of those funds to the customer, which seems automatically to post it to A/R... (which is why our A/R often shows a negative balance when a Balance Sheet is printed).  In QuickBooks we then create and post a normal Sales Invoice (which corrects the negative A/R balance), and ship the order.    I would be so grateful if someone would set us straight!   To avoid negative balances in A/R, must we journal those advance payments, and then reconcile them when the final invoice is created?

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