It is not unusual in our business for clients to pay us up to 50% in advance before we start a Landscaping job. I record that payment using a Money Received transaction. If we are lucky (because they are so pleased with the transformation of their garden) the clients tend to pay their balance immediately on completion of the work - again I use a Money Received transaction to post the Cash/Cheque to the bank account.

Now, here comes the problem...... when I enter the Invoice for the job into Solar, so that the money received is reflected in our Income, I cannot see how to associate the payments in advance with the Invoice ?

I do realise that I could raise pro-forma invoices each time I receive a payment, but is this the only way to deal with this situation ?

Hi Alan,

The simplest option is to create a new liability account called 'Customer Prepayments'. When you receive an advance, record a General Transaction from this account to the Cheque Account. When you record the invoice, add an invoice payment deposited into the Customer Prepayments account.

However, if you are registered for VAT using the cash method, you cannot use this option because you are supposed to include the VAT component of your prepayment on your VAT return. In this case it's a bit more complex: you need to create a future-dated invoice and a corresponding credit note which reverses the invoice. When you receive an advance, record a payment against the invoice. When you perform the work, delete the credit note.

I hope this makes sense - let me know if you need more information.

It is strange though, that if I delete the Advance Payments and then, after I have posted the Invoice, I can then enter the payments as Payment Received against that Invoice - even though the Payment dates are BEFORE the Invoice date - which actually achieves what I want to achieve but in a very round about way.

Yes, I can see that it is somewhat counter-intuitive.

I realise this is a rather old thread, but it is exactly what I need to do. I am also taking deposits and want to know how to account for them. I have created a deposits account under liabilities and transfered all existing deposits into it. I'm not sure exactly what I have to do when I raise the invoice. Presumably the invoice is for the full amount but showing a payment. You say 'when you record the invoice, add an invoice payment deposited into the Customer Prepayment account'. Can you be a bit more explicit about exactly what the steps are to do this? I'm having difficulty understanding how I decrease the liability without affecting the actual income. Do I have to show the deposit as a separate line item on the invoice?

Hi Nigel,

Yes, the invoice should be for the full amount - don't include a separate line on the invoice for the payment. Instead, create an invoice payment as described in the following link, except that the Deposit Into Account should be 'Customer Prepayments':
http://www.solaraccounts.co.uk/help/how-to-record-an-invoice-payment.php

This payment will reduce the balance owing on the invoice and will also reduce the balance of the Customer Prepayment account without affecting income.

Regards,

with regard to
"However, if you are registered for VAT using the cash method, you cannot use this option because you are supposed to include the VAT component of your prepayment on your VAT return. In this case it's a bit more complex: you need to create a future-dated invoice and a corresponding credit note which reverses the invoice. When you receive an advance, record a payment against the invoice. When you perform the work, delete the credit note.

I hope this makes sense - let me know if you need more information.
Mark McLaren (Solar Accounts) - November 21st, 2009 2:16pm UTC"

If the payment raises a liability in Customer Pre-payments then where does this account come in here with VAT accounting example.

Hi Nigel,

Since 2009 we have made it much easier to record an advance payment - just create a Money Received transaction with the Type set to 'Advance Payment'. This will correctly account for the VAT.

Note also that you don't incur a VAT liability in the accounts when you receive the payment, even though VAT on the payment is due to be paid to HMRC. This is because you can recover the VAT from HMRC if you return the advance payment to your customer without providing the goods or services.

Regards,

Hi Mark

Following your last comment on this thread,
Are you saying we set the VAT rate to zeo for advance payments received?

Hi Andrew,

No, the VAT Rate should be the standard 20% when you click More Options > VAT for Advance Payment. This will affect the figures on your next VAT return but will not affect your VAT Liability balance until you allocate the payment to an invoice.

Regards,

Hi Mark
Twas all as clear as mud, so just deleted the payment, reset the transaction default. Generated the invoice, then entered the advance payment (even though date was before invoice).
Now having tried a trial run based on your explanation, it now makes sense. I'd missed/overlooked a couple of options when i tried to enter it previously.

Once again, many thanks for your excellent response.

Cheers
Andrew