QuickBooks Small Business

How to Handle Customer Prepayments in QuickBooks

Written by Carrie Kahn

As a QuickBooks consultant, we often have to figure out workflows for unusual situations involving prepayments from customers — including how to handle customer prepayments in QuickBooks. For customers that are new to the business, they may have to prepay for inventory that they have not received. It’s important to manage the workflow so that the accounts receivable and the profit and loss reports are accurate.

In order to track these prepayments, you need to create an account called “Prepaid Customers.” This would be a current liability account. When you make a deposit for the prepayments, you will deposit it straight to this new account and code this to “Prepaid Customers.”

Then you will go into Customer>Create Credit Memo Refund. Create a Credit Memo (opposite of an Invoice) to the customer for the same amount as your check. You will need to create an item code that points back to this same chart of account — “Prepaid Customers.”

Then create the credit memo using this item code:

If this is done correctly, your “Prepaid Customer” account will now be -0-.

Also, your Open Accounts Receivable will have a credit balance on it.

Now your prepayment is appropriately reflected. Typically, the inventory is ordered with the prepayment, and there will be a time lapse before the inventory is received.

Inventory is received, and ready to be invoiced to the client. (We are not going through the vendor/bill steps).

Next step is the invoice needs to be entered. Click Customer > Enter Invoice.

After this invoice is created, we need to apply our prepayment. QuickBooks will recognize there is a prepayment, or you can select the button at the top to apply credits.

After you select the correct prepayment entry, click done. 

When everything is applied properly, your accounts receivable will look like this:

These examples were displayed in QuickBooks Desktop edition as this is the version we recommend for tracking inventory. You can continue to add more of a prepayment to your customer and keep a running balance of available credit to apply to their purchases. In this example, the amount of the prepayment was a different amount from the inventory purchased. If they were the same amounts, then your accounts receivable would be zero.

If you love QuickBooks and want to learn more about the advantages, meet me at Accountex this year. I will be discussing the power of partnering to demystify all of the options in QuickBooks and make it easier to understand. I love to talk about QuickBooks Desktop, so stop by and check out my demo presentation.

About the author

Carrie Kahn

Complete Business Group helps small businesses purchase the RIGHT QuickBooks product at the lowest price and offers a team of experts to provide high level customer service so that they use QuickBooks® the way it was intended. With the many offerings from online to desktop we understand the benefits and limitations of each option to help you find the right solution. We have a team of certified ProAdvisors located all over the US ready to support you remotely or locally.

Carrie Kahn, CPA, the founder and CEO of Complete Business Group, has been helping small businesses purchase the RIGHT QuickBooks product at the best price and offers a team of experts to provide high level customer service so that they use QuickBooks®the way it was intended.

Carrie has been supporting and selling QuickBooks since Dos V1. She has been an Advanced Certified ProAdvisor since 2002. She joined the Intuit Reseller Program in 2008. In 2015 she launched the Complete Business Partner Program
mentoring ProAdvisors in selecting the best QuickBooks products for their clients at best pricing for their customers. She is very involved in the QuickBooks community providing extensive resources for ABBO Facebook group , Scaling New Heights, School of Bookkeeping, CPA Academy, Intuit’s Firm of the Future, and CBG Blog. Carrie is a lead QuickBooks Author for the Accountex blog. She was named Insightful Accountant’s Top 100 ProAdvisor every year since 2014 and was Insightful Accountant’s 2017 Social Media Resources ProAdvisor. She currently serves on the Intuit Reseller Program Council. CBG has been in the top 10 Intuit Premier Resellers (IRPs) since 2012 and currently is ranked #1 in the East. She is currently serving on the IRP Council. Carrie’s company, CBG was named Partner Program of the year for 2017.


  • Warning! This is does not address sales tax issues when you are on a Cash-Basis reporting set up with the State of Arizona.

    • This workflow makes the sales tax tracking clean.

      The invoice is created for the customer when the product(s) are received and sales tax is charged if applicable.

      Sales tax is not charged when the customer makes a down payment on the order.

      Cash/Accrual basis for sales tax is not affected by this workflow. This is a report setting based on when the client pays and when the business needs to pay in the sales tax.

    • Hi, Carrie, nicely done!
      I can see how this method is an improvement over using Receive Payment for a cash basis customer, because the unused portion of the Credit Memo will reverse with the Accrual to Cash reporting switch. I’m curious though about keeping the credit balance in the AR as opposed to maintaining it in the Customer Prepayments account and using a negative entry on the invoice to reflect the prepayment. What do you see as the advantage of one method over the other?

    • Thanks for the detailed instructions. I wondered though why I can’t make the receipt directly to the customer instead of adding the credit memo step. Shouldn’t the customer receipt be enough as long as it is coded to prepaid sales? Also, could you please demonstrate how to account for the inventory not received yet that goes with the sale? Should I do an accrual for the cost to COGS and reverse when the inventory is delivered to the customer? I may be making this more complicated than it needs to be. With a normal sale, we have a vendor invoice coded to COGS and of course a sale to revenue. I just don’t know how to report the inventory that would be coming in because of the prepayment.

      • Do not create a sales receipt because it will record as a sale that date, deducting inventory you do not have.

        I left this optional step out of the blog because sales orders are only available in Premier and Enterprise. If you want to track this sales order, you can create it listing the inventory because it’s non-posting. Once the inventory is received through the normal steps, then you can create an invoice from the sales order when becomes an actual sale.

        My steps are created to show the transactions in the proper time frame without the need to accrue.

  • Can you explain why this extra step of entering it to prepaids is needed. Why wouldn’t you just leave it as a credit in AR. What is the other side of the “prepayment” item if you do it as instructed?

    • Hi, Jennifer! If you haven’t read the thread from the beginning post, it might help answer that questions. There are pros and cons for either booking an unapplied payment or a deposit (dr cash, cr “prepaid customer amounts” (a liability account)). Effect on reports, report reader preferences, etc. At the end of the day, you can consider it either a requirement from the boss or accountant to record prepayments separately, or as a preference to do one or the other.

  • Hi Carrie,
    I followed your steps but got stuck when I posted the customer’s prepayment. I drafted an Echeck out of their checking account and the “deposit to” only allowed the money to go into a Bank or Other Current Asset account, not the Current Liability account I set up. I put it in undeposited funds like all other payments, so now AR shows double the credit balance: the payment and the credit memo. Any help you can give is appreciated.

  • I am having trouble using this method in my business. I run an agricultural feed store and we have a promotion each spring with discounts for prepaying cattle mineral to use through the summer. If I use the Credit Memo as in this article, the credit balance on that customer’s account screws up the billing for the period that they have not picked up all of their prepaid mineral. (They are still buying other feed items through the summer on 30 day terms and picking up some of the prepaid mineral each month.) I would be very interested in getting some help for my particular situation.

    • There is an alternate method to the one Carrie described. You can find my question about it on August 13, where she answered that is mostly preference for what method is used.
      This process uses the same “Other Liability” type of account, and a new item also, but I format these a little differently. I use an “Other Charge” type, and check the box to make it a double sided item (this item is used in assemblies …) and put your new Prepaid (aka Customer Deposits, or what makes sense to you) GL account in BOTH sides – sales & cost. Mark it non-taxable.
      When the deposit is received, create the invoice using this new item. It is mapped to AR as an invoice, but posting the the liability account. Receive the check against the invoice, which zeros out AR, and follow the rest of the deposit process as usual.
      Now comes the customer to purchase supplies. Enter the entire order as if it were being paid in full by check or other. Now you enter the prepaid item AS A NEGATIVE for what was paid in advance. The invoice is reduced to the total of the other items, sales tax is charged timely, the prepaid balance is reduced, and the customer pays for the other purchases as usual.
      For the prepaid GL account, you can then get a report totaled by customer to see what the balances are. To access this report, I pull a balance sheet to the appropriate date, and drill down to the detail. Going through the account from the report opens the detail report with an extra field that allows you to Total By selections from a pull-down menu. Of course, the report can be memorized.
      I’m using this for a client to record draws on jobs with a prepayment. Haven’t found fault with it yet.

  • What about the date? Can you postdate the credits to be used in the summer? Can you keep the invoices separate for mineral vs other feed items? Then only use the prepayments toward these special invoices for minerals?

    • Thanks for a quick reply! If I postdate the credits I’m assuming that they will not show as available to be applied to an invoice when merchandise is picked up before that date? I like the idea of using the credit memo because it will give this reminder. In the past we have sold an item called prepaid feed at the time of sale and then manually keep track of when actual Inventory goes out and apply against the prepaid feed item that was sold. It appears to me that perhaps the best way to handle this situation would be to have a separate customer account for those that use the prepaid program and keep it separate from their other purchases. That would keep the accounting correct and still help us not miss applying their prepaid credit as they pick up product. Does this sound workable to you? No matter what we do there is an element of special care needed it seems. Thanks so much for your help and article!

  • I am new to quickbooks. This article is very helpful for me. I think that I can work well quickbooks with the help of this article. Thanks for sharing this article.

  • I used this method recently. When I run a sales by customer report, it reflects as though my customer had no sales, even after being invoiced. How do I fix this where my customer reports agree with the sales in the p&l?

    • I understand that. But once the customer was invoiced, their individual sales report shows 0. As if the credit memo posted to the sales account. Despite the item being posted to the deferred income account as instructed here.

      When I run the income statement, the sales number is fine. If I run the sales by customer report, the total is less than the income statement number by the amount of this credit memo. Is it because the credit memo was applied to the invoice? Should I leave them unlinked?

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