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Journal Entries created by Prepayments in Accounts Receivables

Problem Details:

What GL entries are created when an AR Prepayment is processed and then applied to an invoice?

 

Solution:

It is recommended that the Prepayment Liabilities GL account specified in the AR Setup / Account Sets screen be set to a different GL account than the Receivables Control GL account.  This allows for a simpler reconciliation process for both accounts.  The prepayment liability account acts as an accrued liability account for services or goods that are owed to the customer (because they have already been paid for).

When a Prepayment is entered as a Receipt Entry, the following journal entry is created:  Debit bank, Credit Prepayment Liability.  When the invoice is posted, a simplified version of th entry created is:  Debit receivables control, Credit revenue.  When the prepayment is applied to the invoice, the entry created is as follows: Debit prepayment liability, Credit receivables control.  This final entry clears the balance in the prepayment liability account, and eliminates the invoice from being outstanding in Accounts Receivables.

Here is a specific example taken from a Sage database, using the accounts from the account set in the screenshot above:

 

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