How to process a Prepayment?

If you need to process a pre-payment (early payment) there are three approaches described below to choose from.

Approach No. 1 – Process a Manual Cash Payment for the Supplier

1. Using Manual Cash Payments process the payment for the Supplier without allocating it to an Invoice and leave the payment “on account” i.e. do not offset it against any outstanding ledger items. GL entries will be a Credit to “Bank” and a Debit to “Creditors”. The Payment will remain unallocated on the Creditors account until the Invoice is entered and offset at a future point.
2. Process the Creditors invoice when ready
3. Using Manual Cash payments (zero payment) offset the invoice and cash payment ledger items.

The advantage of this method is that all activity for the Supplier will be recorded against the Suppliers account and therefore history will be available going forward.

Approach No. 2 – Process a Sundry Cash Payment

1. Using Manual Cash Payments process a non-Supplier payment by entering a Payee Name. Use the GL posting and select a “Prepayments” account. GL entries will be a Credit to “Bank” and a Debit to “Prepayments”. The transaction amount will remain in the Balance Sheet.
2. Process the Creditors invoice when ready
3. Using Supplier journals offset the Prepayments account and the Suppliers account

Using this method only the invoices will be recorded against the Suppliers account. Visibility of the payments will only be available via the Prepayments account. It should be noted that this process could also include Bank Reconciliation Bank Charges/Fee options in place of Sundry Cash Payments.

Approach No. 3 – Create a Shipment for the Purchase Order and process the Invoice/Payment against the Shipment

1. Create a Purchase Order – No GL entries
2. Ship the Purchase Order – GL entries will be a Credit to “Purchase Accruals” and a Debit to “Purchases In-transit”. This approach will show the inventory in the Stock ledger as In Transit Purch and will be visible to all Inventory Ledger users. Expected delivery dates can also be updated so they’re visible.
3. Process the Suppliers Invoice and apply to the Shipment – GL entries will be a Credit to “Creditors” and a Debit to “Purchase Accruals”
4. Process the Payment to the Suppliers account – GL entries will be a Credit to “Bank” DR Creditors
5. When the stock is received finalise the shipment – GL entries will be a Credit to “Purchases In-transit” and a Debit to “Inventory on Hand”

Using this method all entries are able to be processed as they occur. They are maintained within System ledgers. There is no need for GL reconciliations or journals. Also if the shipments are foreign the extra charges such as freight, duty etc can also be captured in the Shipment and allocated across the line items of the shipment depending on the chosen method. Foreign Currency variations can also be accounted for during the process.