How to account for prepayments in Xero

Let’s look at a scenario in which you’ve paid £1,000 security deposit to the venue of your conference being held in six months’ time. The deposit will be deducted from your final bill, or it will be refunded in you cancel.

On the reconciliation screen, you’ll see the cheque presented for £1,000.

On the Create tab, we’ll select “Add Details”.

This will give you the dropdown menu and select “Prepayment”. 

Fill in the details use a specific prepayment account. Select the correct tax rate if required and save, and then reconcile.

You can also create a prepayment transaction from the “Manage Account” button. This is useful when you’re sending a check and want to account for it before it’s been presented.

From the “Manage Account” button, select “Spend Money” for this example.

And from the dropdown menu, choose Prepayment. Complete the details and then save.

Then, when the check clears, you can match it to the statement line as it appears on the reconciliation screen.

Let’s say that time has now come to either refund or apply this prepayment to a bill or sales invoice if it was a deposit receipt. You’ll be able to find the prepayment transactions in the “Awaiting Payments” tab for either sales or purchases where you can simply click into it.If 

If you’ve organised for it to be refunded, you can enter the details here. Leave the amount as if it was fully refunded, but you can change it if the refund amount was different. Then click “Add Refund”.

This will now show under the “Account Transactions” tab in Banking and be waiting to be matched to the statement line when it appears in the reconciliation screen.

To allocate the outstanding amount to an invoice or bill instead of a refund, drill into the prepayment, and in the prepayment options dropdown menu, select “Allocate Credit”. 

Choose the invoices you’d like to apply and then allocate.

And that is how you account for prepayments in Xero