Journal Entry for Prepayment Received

In accounting, prepayment is defined as a payment made in advance of its due date. This can occur for a variety of reasons, such as when a customer pays for a service that has not yet been rendered. In such cases, the prepayment is recorded as a liability on the company’s balance sheet. Once the service is provided, the liability is reversed to revenue on the income statement.

Prepayments can also take the form of deposits, which are typically refundable if the product or service is not received. For example, when booking a hotel room, customers are often required to pay a deposit upfront. If they cancel their reservation, they will typically receive a refund of their deposit. However, if they follow through with their stay, the deposit is applied to the cost of the room and is no longer refundable. In either case, deposits are classified as liabilities on the balance sheet until they are applied to revenue.

It is important to carefully account for all prepayments in order to maintain accurate financial records. This will ensure that your company’s balance sheet and income statement accurately reflect its financial position.

The seller has to record the liability on the balance sheet after receiving prepayment from the customers. It will reverse to revenue account when the goods or services are delivered to customers.

Journal Entry for Prepayment Received

The customer makes payment to the supplier before receiving goods or services. The supplier has the obligation to deliver the goods or services to the customers. It also records the cash received from the customer.

The journal entry for prepayment is debiting cash and credit customer prepayment.

The cash increase as the company gets payment from the customers. The prepayment is the liability on the balance sheet.

When the company delivers goods or services to the customers, it will record the revenue on the income statement. The customer prepayment will be reversed from balance sheet.

The revenue is recorded when the company provides goods or services, it is not related to the cash collection.

The journal entry is debiting prepayment and credit sale revenue.

Example

Company ABC is the supplier of goods from the oversea. During the month, company receives a prepayment of $ 30,000 from a customer for the purchase of goods which is not yet delivered. Please prepare journal entries for prepayment and related transactions.

Company ABC receives the prepayment of $ 30,000 for the goods that will deliver in the future. By the time that payment has been received, ABC has to record cash and prepayment.

The journal entry is debiting cash $ 30,000 and customer prepayment $ 30,000.

When ABC deliver goods to the customer, it needs to record revenue.

The journal entry is debiting customer prepayment $ 30,000 and credit revenue $ 30,000.