I. Customer prepayment invoices

Sellers can request a deposit or advanced payment to secure a commitment from the customer before they deliver goods or services. The customer prepayment invoice feature provides up-front funds to cover initial costs, reduce financial risk and ensure that the buyer is committed to the transaction.

A. Types of prepayment processes

Prepayment as a deposit

In this process, the buyer makes an initial partial payment to secure goods, services, or a contract. This partial payment is often referred to as a deposit. It's either a percentage or a fixed amount of the total value of the sales order. The prepayment invoice functions similarly to a billing document. The final invoice is issued later and reflects the full amount of the sales order.

Prepayment invoice as a tax invoice

In this process, the seller issues a real prepayment invoice to the buyer. This invoice includes sales taxes, if applicable. The buyer pays the invoice amount upfront. Then, when the payment is completed, the seller can proceed with the delivery of goods or services. Later, the official invoice is sent out. The value of this invoice is the total outstanding amount, which is the difference between the total sales order value and the total prepaid amount.

Example of a customer prepayment invoice

A customer places an order for $5400 and agrees to pay $2700 as a prepayment. The final invoice is issued after the goods and services are fully delivered.

The following accounting entries are recorded:

Prepayment invoice creation:

     Debit: Accounts receivable: $2700

     Credit: Prepayment (Deposit): $2700

Payment of prepayment invoice:

     Debit: Cash/Bank: $2700

     Credit: Accounts receivable: $2700

Apply the prepayment on customer invoice:

     Debit: Prepayment (Deposit): $2700

     Credit: Accounts receivable: $2700

Final customer invoice creation:

     Debit: Accounts receivable: $5400

     Credit: Revenue: $5400

In this example, the final invoice includes the total order amount ($5400) and corresponding tax entries. The customer should pay the open amount, which is the total invoice amount ($5400) minus the prepaid amount ($2700). The entries ensure that the prepayment is correctly recorded and offset against the final invoice when the goods or services are delivered.

II. Setup for prepayment invoices

To set up customer prepayment invoices, follow these steps.

A. Enable the Prepayment customer invoice feature:

Navigate to Feature Management, and enable the 'Prepayment customer invoice' feature.

B. Create a sales category for prepayment:

Navigate to Sales and Marketing > Setup > Categories > Sales categories and create a new category for 'Customer prepayment',

C. Setup inventory posting:

Navigate to Inventory Management> Setup > Posting > Posting and set up a default ledger account for posting. Set the type to Customer prepayment.

D. Setup account receivable parameters

On the Updates tab, on the Invoice FastTab, in the Prepayment section, select the Check mandatory sales order confirmation parameter to create a prepayment invoice only if the sales order is confirmed.

On the Ledger and Sales tax tab, on the General FastTab, in the Prepayment invoice section, and in the Prepayment application policy field, select one of the following values:

     Notification – Prepayments are manually applied. If the prepayment isn't applied, you receive a notification when you create the final invoice.

     Automatic – Prepayments are automatically applied to the sales order if full payment is received and settles the prepayment invoice.

On the Electric Documents tab, select the Prepayment invoice configuration in the dropdown list. and click save.

E. Setup number sequences

On the Number Sequences tab, set up number sequences for the Prepayment invoice, Prepayment invoice voucher, Prepayment invoice reversal, and Prepayment invoice reversal voucher references.

F. Setup process automation

Navigate to System Administration > Setup, and select Process Automation. Select 'Automated prepayment settlement posting.' and initialize process automation,

III. Prepayment invoice process

The process for customer prepayment invoicing includes the following steps.

     1. Create a sales order.

     2. Define a prepayment value on the sales order.

     3. Confirm and post a prepayment invoice.

     4. Settle the prepayment invoice.

     5. Apply the prepayment invoice to the final invoice.

1. Create a sales order:

Navigate to Sales and marketing > All sales order > Create a new sales order or Accounts Receivable > All sales order > Create a new sales order. 

In this example, I am choosing item number '1000' from the Contoso database. 

2. Define a prepayment value on a sales order

When you create a sales order, you can define the prepayment amount by following these steps.

a. From the created sales order, go to invoice tab > prepayment and select Payment proposal.

b. Select the prepayment type:

     Percentage - If you select Percentage, the Prepayment value field is enabled. This field represents the percentage of the total sales order amount that is required as a prepayment. The Total prepayment amount field shows the calculated prepayment amount.

     Fixed - If you select Fixed, the Total prepayment amount field is enabled, and you manually enter the prepayment amount. The amount that you enter can't exceed the sales order amount.

c. In the Sales category field, select the appropriate sales category that determines the revenue account according to the posting settings.

3. Generate a prepayment invoice:

After the prepayment proposal is confirmed, generate the prepayment invoice by following these steps.

a. Navigate to the sales order invoice tab, Prepayment and click on Prepayment invoice.

b. Review and post the prepayment invoice. The page shows information about the overall prepayment invoice, including the customer invoice account, date, prepayment invoice number, prepayment status and prepayment amount.

3. Select Post. The open customer transaction is created, and the status of the prepayment invoice is Pending.

Posted customer transaction - 

Note: Make sure sales order is confirmed else you will get below error,

4. Settle the prepayment invoice:

When you receive the payment for the prepayment, the customer payment journal is posted to settle the prepayment invoice amount. After the prepayment invoice settlement, the status of the prepayment invoice is Received, and Apply prepayment is available.

Navigate to Accounts Receivable > Payments > Customer payment journal and enter details for payment and post the journal.

Posted customer transactions -

5. Apply the prepayment invoice to the final invoice.

a. On the Apply prepayment page. in the select prepayments to apply list, select the prepayment.

b. Select Apply prepayment.

    After the sales order invoice is posted, the selected prepayment is applied to the invoice when the Automated prepayment settlement posting background process is successfully run.

c. The remaining amount of the sales order invoice can settled through a customer payment journal and shows the outstanding amount.

6. Complete the pick and pack process and invoice the sales order -

After the successful completion of the invoicing process.

Posted customer transaction - 

Thank you! See you in the next blog!!