Record a supplier advance or downpayment
Watch this video on how to record a vendor's advance payment, or read on below
Sometimes your supplier may ask you to make a partial advance payment for a service they will complete in the future.
Suppose you've agreed with your vendor to pay 1500 AED as an advance payment today for work totaling 5,000 AED, with the remainder of 3,500 AED to be paid once the service is received.
Here's how you will record these transactions:
- Record the first bill of the 1,500 AED advance payment. When you receive an invoice from your vendor for an advance payment you'll want to record it as a bill under the Prepaid Expenses account. Start by creating a bill with a line item against the "Prepaid Expenses" account for 1,500. Choose a meaningful description such as "30% advance payment". If the transaction attracts tax, make sure to choose the correct tax rate (e.g. VAT on Purchases) so Wafeq can record tax assets. Save the bill to mark it as AUTHORIZED. At this stage, no expense is recognized in your Profit and Loss.
- Record the advance payment. When you pay your vendor the advance, record a payment against the bill you've just created, paid through the account from where you're sending the money (e.g. bank account)
- Record the final bill. When you receive your vendor's invoice for the full service and are ready to bill the remainder and recognize the expense for the full work in your books, create a new bill with a line item against your expense account, for a total of 5,000, and add applicable tax rates.
Add another line item with the description "Advance payment applied", against the account "Prepaid Expenses" and an amount of -1,500 (negative 1,500), and add applicable tax rates.
Your net bill amount should now be 3,500 plus any applicable tax rates. You are now ready to save your bill.
- Record the final payment. When you make the second payment to your vendor, record a payment against the bill in step 3, paid through the account from where you're making the payment (e.g. bank account).
At this stage, we've recognized an expense of 5,000 in your books, and the "Prepaid Expenses" account should have a balance of 0.
That's it. You've recorded an advance payment for a vendor.