Journal Entry for Down Payment

Down payment is the process of payment that customers settle in the initial stage of purchasing goods or services. Some suppliers require the customers to pay the down payment when placing an order. It is the same as supplier advance, but down payment usually happens in the purchase of expensive goods or services. The purchase of a home or car usually requires a certain percentage of the purchase price. The payment is called a down payment.

Most customers will take loans to purchase the car or home from the suppliers. In order to obtain a loan from the supplier, they require to pay a certain amount as a down payment. The remaining balance will be reclassed as a loan from the supplier. The customers have obligation to pay the installment on a monthly basis.

Down payment helps to ensure that customers have the commitment to pay back the loan to own the car or home. It will a problem for the supplier when customers stop monthly payments and return the property. The supplier will need to resell the item to the new customers. It will be a problem for the company.

The down payment will reduce the amount that customers need to borrow from suppliers to complete the purchase transaction. It will reduce the monthly installment that buyers need to pay.

Journal Entry for Down Payment

When the company sells goods to the customers with a down payment, they will receive cash initial payment from the customer.

The journal entry will debit cash, loan to customer, and credit inventory balance.

The cash on balance sheet will increase equivalent to the amount paid by the customer. Inventory will decrease from the balance sheet.

Loan to a customer will present as the assets on the balance sheet. The company will produce the installment schedule for the customer to make payment based on the loan amount. In this article, we will not detail the treatment of loan payment.

Journal Entry for Down Payment Example

ABC is a company that sells car to consumers. The company requires to pay a down payment of 30% of the car price and the remaining balance is financed as loan.

On 01 January, Mr. A purchase a car cost $ 100,000 and make a cash deposit of $ 30,000. The remaining balance of $ 70,000 is classified as a loan. After making the payment, ABC gives the car to Mr. A, but he still has obligation to pay the monthly installment of over the 70% of the car price. Please prepare a journal entry that relates to the down payment.

When Mr. A pays $ 30,000 to ABC, ABC needs to record cash receive $ 30,000. At the same time, company needs to transfer the inventory (car) to Mr. A. The remaining balance of $ 70,000 will be recorded as loan receivable which will be collected from Mr. A base on the schedule.

The journal entry is debiting cash $ 30,000, Loan receivable $ 70,000 and credit inventory $ 100,000.