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Accounting for down payment?
RP - Thread posted August 24, 2010 by Jonathan Camacho
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Title:
Accounting for down payment?
Content:
What is the GL entry to record an invoice sent to the customer to collect for a down payment based on a signed contract? Is it Debit A/R and Credit Deferred Income? Why is it deferred income when no money has been received yet? Thanks in advance...Jonathan
Answer
The way we do it is debit cash and credit a liability account such as refundable deposits. When the A/R invoice is generated, this debits A/R and credits sales. We then credit A/R for the amount of the deposit / down payment and debit the liability account.
The way I handle the transaction is to debit A/R and credit a Prepaid deposit account. Deferred Income will work, but I believe a prepaid deposit account is more accurate since it is attached to a unique contract. Deferred income is more aptly used to amortize income.
My accounting system has the ability to attach the deposit to a unique sales order, when the order is invoiced the deposit is automatically applied and the the required general ledger entries are completed without need for a general journal entry. I deal with large contracts often, so this occurs quite frequently.
Many companies will not issue a deposit check until they receive a deposit invoice. As such, It is ok to issue the deposit invoice in advance of actual payment. A/R is debited and the prepaid account is credited. If the deposit is not received prior to shipment or final invoicing, it can be credited off the books with a debit to the prepaid deposit acct and a credit to A/R.
Regards,
Jeff
All of those posts are wrong so far if you are using Generally Accepted Accounting Principles. The correct way to do this is plain and simple
When the invoice is issued.
Debit Account Receivables ( the signed contract with the clause for that advance payment creates the legality of that receivable)
Credit Unearned Revenues. ( because the service is not yet rendered).
When Money is received
First: reverse the transaction by crediting A/R and debit Unearned Revenue ( the only way to undo that transaction)
Then
Debit Cash
Credit Unearned Revenue
When Service is rendered for the amount received
Debit Unearned Revenue and credit Revenue
Since the invoice was created using an accounting system the A/R part is automtically done. THis example is following a manual system.
I second Luramon's response as being correct under US GAAP.
When an entity has a right to demand cash payment from another (i.e., a contract permits it to issue an invoice), it has obtained an asset. See the descriptions of "assets" at the FASB's Statement of Financial Accounting Concepts No 6, "Elements of Financial Statements", paragraphs 25-26.
Simultaneous, the entity incurs an obligation to perform or return the asset. See the descriptions of "liabilities" at the FASB's Statement of Financial Accounting Concepts No 6, "Elements of Financial Statements", paragraphs 35-36. Crediting an account, such as "Unearned Revenues", records this liability.
Scott
The money is often received far in advance of the actual revenue generating invoice. The accounting entries above are not practical in this sense. Here is how it usually flows. Please note the Prepaid deposit account I mentioned earlier is a liability account that works the same way as unearned revenue..it is just a descriptive title when a customer prepays a deposit in advance.
A deposit invoice is generated for 50% of the sale
Debit A/R
Credit Prepaid deposits (this creates a liability)
When cash is received
Debit Cash
Credit A/R (The Liability Remains)
When an invoice is generated and the deposit is applied
Debit A/R (50%)
Debit Prepaid Deposit (50%) (This satisfies the liability)
Credit Revenue
If the deposit is 100% there is no A/R debit.
This happens frequently, and it is done by the system when the deposit is attached to the sales order.
It is good to reference GAAP, but most of the time these transactions are intuitive.
Regards,
Jeff