Vendor prepayments and deposits in Quickbooks Online

Keep track of deposits

Clients may be required to provide deposits or prepayments to vendors prior to the receipt of goods or services. Similar to the retainers that they request from their own customers, clients must adhere to a clearly established workflow when dealing with these prepayments to ensure precise bookkeeping.

It is a frequent mistake for clients to input the bill for the entire amount prior to the completion of services or receipt of products. This issue is particularly problematic when monitoring inventory because the inventory has yet to be received.

Methods for tracking vendor prepayments

The act of prepaying vendors for purchased items is a common occurrence for clients. For instance, interior decorators may need to prepay for furniture, while contractors may need to pay a deposit to their subcontractors. In such cases, clients are required to pay a retainer, which is a form of prepayment. While these payments may go by various names such as deposit, retainer, or prepayment, we shall refer to them as prepayments throughout this training. Essentially, we are referring to expenses that are paid in advance of the services provided or products purchased; in other words, prepaid expenses.

There are two options for entering prepayments to vendors in QuickBooks Online. When determining which is the best method, consider the following factors:

• Whether financial statements are needed (for example, for investors)
• How often the client pays vendor prepayments and how much they are
• How much time will pass between paying the vendor prepayments and the work being done or products delivered
• The total value of combined vendor prepayments at year-end.

Using accounts payable

The methodology utilized is comparable to that of accepting remunerations in lieu of accounts receivable, as expounded upon in the lesson pertaining to Customer Prepayments and Deposits. No preliminary configuration is required. The process adheres to the conventional workflow, potentially rendering it more convenient for certain patrons who engage in the transactions, as opposed to the accountant or bookkeeper undertaking this responsibility.

Follow these steps to use accounts payable to record and apply prepayment

1. Enter the prepayment by creating an expense, bill or check transaction then enter the account Accounts Payable in the grid section. This creates a negative payable. 

2.  When the bill (for which the prepayment should apply) comes in, enter the bill for the total amount.

3. Pay the bill. When you check the bill, the credit will be applied if Automatically apply bill payments is selected in Account and Settings. If you are not fully applying the credit, change it to the appropriate amount. If you are applying the credit but not paying the remainder of the bill, clear the payment amount.

Use other current asset account

One alternative method for monitoring prepayments made to vendors involves inputting a check/expense or generating a bill and documenting it in an Other Current Asset (OCA) account, commonly referred to as Vendor Prepayments. The balance of this account would be augmented until such time as the ultimate bill is prepared for payment.

1. Create another current assets account for Vendor Prepayments.
2. Enter a check or an expense to a vendor and post to the Vendor Prepayments asset account in the Category detail grid.
3. When the expected bill for the goods and services comes in, enter the bill for the total amount using either the Item details grid or Category details grid, whichever is appropriate. Enter the amount of the prepayment in the Category details grid as a negative amount.

The bill shall correspond to the residual balance after subtraction of the prepayment, and the act of recording said bill shall lead to a reduction in the asset account's balance. The aforementioned method entails the modification of the bill's amount, as shall be exemplified hereafter.

Another viable approach to this conundrum, one which does not involve any adjustment to the bill's amount, would be to enter the entire bill amount and then proceed to enter a vendor credit equal to the prepayment amount, which ought to be applied accordingly.

When ready, apply the credit on the Pay Bills screen

When should clients use this method?

This alternative is applicable for vendor prepayments of substantial amounts or those that remain unsettled for a considerable period. It conforms to the universally acknowledged accounting principles. The benefit of employing this approach is that upon perusal of the Bills and Applied Payments report, the bill's total amount, vendor credit, and bill payment will be discernible.

In contrast, if a bill is not entered - perhaps the purchase is Cash on Delivery - an expense transaction for the total purchase amount should be entered, and the prepayment must be entered in the Category details grid as a negative value.

Using accounts payable to record a prepayment 

First, we’ll need to make sure that Automatically apply bill payments is selected in Account and Settings. This allows the credit to be applied automatically when you check the bill, as you’ll see later.

Now we can post the vendor prepayment to accounts payable (A/P).

1. Enter the prepayment by creating a Check
2. In the Category column of the Category details grid, select the Accounts Payable (A/P) account
   
   This creates a negative payable.
3. When done, select Save and close

This prepayment should apply to the bill when it comes in.

1. When the bill arrives, create a new Bill
2. In the Amount column, enter the total amount of the bill
3. Then select Save and close
   
   Now that both the prepayment and the bill have been entered, in the Unpaid Bills report we can see the negative amount for the prepayment and the positive amount for the bill in full. The amount owing to this vendor is the total, or net amount of the two.

Now it’s time to pay the vendor.

1. Select +New, then Pay bills 
2. Select the Payment account
3. Check the box of the bill to pay 
   
   When you check the bill, the credit will be applied if Automatically apply bill payments is selected in Account and Settings.
   
   Note that QuickBooks Online fills in the total amount of the credit in the Credit Applied column, and the remainder of the bill in the Payment column. Your client can apply all or some of this deposit against the bill. 
4. If you’re not fully applying the credit, change it to the appropriate amount. If you are applying the credit but not paying the remainder of the bill, clear the payment amount 
5. Then select Save and close 

The bill is now marked and paid. Both the prepayment and the bill no longer appear on the Unpaid Bills report.

Using an Other Current Asset (OCA) account 

Start by creating an Other Current Asset (OCA) account to track prepayments made to vendors. 

1. From the left-hand navigation, select Accounting and then Chart of accounts
2. In the Chart of Accounts, select New
3. In the pop-up window, select Other Current Assets for both the Account Type and Tax form section dropdowns 
4. In the Name box, enter a name. We call it Vendor Prepayments
5. Then select Save

Now let’s enter the check or expense to the vendor for the prepayment. We’ll use the same details as in the previous video.

1. Select + New and then Check
2. Populate the form with the Payee, Bank account, or Payment date of the prepayment
3. For the Category, select the Vendor Prepayments account
4. Add a note in the Description field
5. Then add the amount of the prepayment
6. Next, select Save and close

Later, when the total bill arrives, we’ll enter it to reflect the amount of the prepayment received.  

1. Select + New and then Bill
2. Populate the bill with the Vendor, Bill date, Due date, and Bill number
3. In the Category box, select the Vendor Prepayments account 
4. In the Amount box, enter the prepayment as a negative value posting to the Vendor Prepayments account
5. Add a note in the Description field
6. In the Item details grid, add the items from the order adding up to the total amount
   
   Notice that the bill automatically deducts the prepayment, and only shows the net amount owed.
7. Finally, select Save and close
   
   Now you can pay the bill as you normally would.