How to account for prepayments in Xero

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.

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On the Create tab, we’ll select “Add Details”.Chartered Accountants, Financial, Accouting, Profit First Professional, Bookkeeping, Health, Wealth, Mindfulness,

This will give you the dropdown menu and select “Prepayment”. Chartered Accountants, Financial, Accouting, Profit First Professional, Bookkeeping, Health, Wealth, Mindfulness,

Fill in the details use a specific prepayment account. Select the correct tax rate if required and save, and then reconcile.Chartered Accountants, Financial, Accouting, Profit First Professional, Bookkeeping, Health, Wealth, Mindfulness,

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.Chartered Accountants, Financial, Accouting, Profit First Professional, Bookkeeping, Health, Wealth, Mindfulness,

From the “Manage Account” button, select “Spend Money” for this example.Chartered Accountants, Financial, Accouting, Profit First Professional, Bookkeeping, Health, Wealth, Mindfulness,

And from the dropdown menu, choose Prepayment. Complete the details and then save.Chartered Accountants, Financial, Accouting, Profit First Professional, Bookkeeping, Health, Wealth, Mindfulness,

Then, when the check clears, you can match it to the statement line as it appears on the reconciliation screen.Chartered Accountants, Financial, Accouting, Profit First Professional, Bookkeeping, Health, Wealth, Mindfulness,

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 Chartered Accountants, Financial, Accouting, Profit First Professional, Bookkeeping, Health, Wealth, Mindfulness,

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”.Chartered Accountants, Financial, Accouting, Profit First Professional, Bookkeeping, Health, Wealth, Mindfulness,

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.Chartered Accountants, Financial, Accouting, Profit First Professional, Bookkeeping, Health, Wealth, Mindfulness,

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”. Chartered Accountants, Financial, Accouting, Profit First Professional, Bookkeeping, Health, Wealth, Mindfulness,

Choose the invoices you’d like to apply and then allocate.Chartered Accountants, Financial, Accouting, Profit First Professional, Bookkeeping, Health, Wealth, Mindfulness,

And that is how you account for prepayments in Xero

About the Author

Annette Ferguson 

Owner of Annette & Co. - Chartered Accountants & Certified Profit First Professionals. Helping online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.

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