Accounting for advance payments from a client is a task that requires careful attention to the way entries are made in a company's accounting records.Once the goods and services related to the payment are invoiced, payment can be applied properly if the process is done correctly.A few specific steps are highly likely to be used when posting those advance payments, based on how closely the business makes use of generally accepted accounting principles.
Step 1: There is a type of advance payment.
The goods or services have been delivered.If the payment is for goods and services that have been partially or completely delivered to the customer, but have not yet been invoiced, it's earned revenue.If the advanced payment is for goods and services that will be delivered and invoiced at a future date, the seller has not yet provided any benefits to the buyer, so it is classified as unearned revenue.
Step 2: A special account can be created in the company accounting journal.
Refer to it as Customer Deposits or Prepaid Sales.Since you owe the customer something, a customer deposit is actually a liability to the business.
Step 3: The advance payment needs to be late for a customer account.
If this is a new client, you need to create a customer account.The earned revenue detail should be posted in that account as well, pending further actions such as filling the order and creating the invoice for that order.You would create an account called Smith Metal Technology.
Step 4: The customer's deposit amount should be recorded.
The Customer Deposits account should be credited in the same amount as the Cash account.Assets such as cash or equipment and dividend accounts are increased by the use of debits.Credit increases liability and equity accounts.When Smith Metal Technology makes a $1,000 deposit, they can credit customer deposits for $1,000.
Step 5: Send an invoice to the customer when the work is done.
On the invoice, note the amount of the deposit previously paid and subtract it from the total amount owed.When the work is done and the customer is paid, revenue can be recognized.If the invoice is for $5,000, deduct the $1,000 deposit from the total.
Step 6: You can record the transaction in your journal.
Customer deposits are debited for $1,000 and accounts receivable is credited for $5,000.By converting a liability into an asset, you can record revenue for the company.
Step 7: The advance payment needs to be posted.
This will be on the balance sheet or income statement based on whether or not a percentage of the work has already been delivered.The amount may be posted to the company balance sheet as a liability if it is classified as "unearned revenue".Once an invoice is created, it will be easier to move the balance if the revenue is connected with the customer's account number.On the balance sheet you would have a line item stating Unearned Revenue, $1,000 Smith Metal Technology, account number 589.Once an invoice is sent, earned revenue can be posted to the company's income statement.
Step 8: Once the invoice is posted, complete the transactions.
Since it can now be counted as a payment on a specific invoice number found in the open accounts payable and considered part of the receivables for the period, this will move the unearned income from the balance sheet.An outstanding line item on the income statement can be moved to the balance of the invoice.After the work is done and the invoice is sent, the income statement will state revenue of $5,000.
Step 9: Good records are kept.
Papers should be kept for at least one year until your accounts have been audited and your taxes are filed.For at least seven years, you can save documentation electronically.