If you collect payments from clients in advance of providing services, you need to record that in your bookkeeping carefully, otherwise, your records won’t be accurate. In this episode of MissionBusinessPodcast.com, Bernard Roesch shares examples of how to record customer prepayments within QuickBooks.
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Example Pre-payment Situations
There are a number of situations where a client might pay for services upfront before the services are done.
- For example, lawyers often require a retainer up front that gets drawn down on as services are provided.
- In another example, a software subscription might be paid for once per year but used throughout the entire year.
In both of these situations, the client is paying for services up front before the services are rendered and it’s important to have that reflected in your accounting.
Charge Customers Upfront
In order to record the prepayment, you need to create an invoice for the amount that the client is paying. However, don’t use a revenue item on the invoice as you normally would. Instead, use a special liability account such as customer prepayments.
When you record the invoice, this will not show up as revenue on your profit and loss. Instead, it will show up as a liability on your balance sheet. It is a liability because you owe the client for the services they have paid for.
Record Revenue As You Deliver Services
As you deliver the services throughout the time period, you need to record that in your accounting.
- You can do this by creating an invoice or sales receipt and apply the invoice to the customer’s prepayments.
- This will draw down on money from the customer’s prepayments and cost your liability to go down.
- It will also cause your revenue for that time period to go up.
This is an accurate report for your business since you are recognizing the revenue during the time period where the services were provided.
Financial Reporting of Pre-payments
When you receive the payment, it doesn’t show up on your profit and loss. Instead, it shows up on your balance sheet. This is accurate because you owe the client for services.
- As you deliver the services, it shows up on the profit mass for the time period where you applied some of their prepayment to the service.
- When you see the prepaid payments liability start to get close to zero, you know you need to request an additional payment from the client or stop providing services.
We Can Help You
If you need help configuring this level of accounting in your business, contact Bernard today. You can also visit MissionBusinessPodcast.com for more insights that Bernard has been sharing with us in the previous episodes.
Need help finding the right QuickBooks software for your business? MISSION Accounting can help.
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