Accounting for Prepaid Vendor Deposits

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When you order a product or service from a vendor, it may ask you to pay a portion of the price before delivery. Catering to prepaid vendor deposits can easily be ignored by the business, among other daily bookkeeping tasks. You must take extra precautions in recording these deposits if you want your books to be accurate. Because it is an upfront payment, it calls for serious attention. Losing sight of them may cause loss to the company because the products are received later, and you would be able to account for the payments later on.Cubicle to Cloud virtual business

The prepaid deposit has no potential loss, but it can become a task at the year’s end to record these expenses because they must be catered to in bookkeeping.

Why are Prepaid Vendor Deposits Required?

It is common to ask for upfront payments for specific products or services to minimize risk. The deposits help for some time and are either returned or added to the credit balance, depending on the situation. Depending on the deal, you may be required to make all or partial deposits. Vendors may ask you to make prepaid payments on large orders or if they do not have a history of doing business with you. In either case, you are required to make the payment to deliver the products.

The amount you pay in prepaid vendor deposits is accounted for as assets in your books because it’s your money, and someone else is just holding it for you. An account titled ‘deposits held by others’ is included in your current assets to cater for such expenses. You name it “deposits held by others” so you do not confuse them with your other accounts, such as prepayments on orders, liabilities, and retainers.

Complete Controller. America’s Bookkeeping ExpertsHow to Account for Prepaid Vendor Deposits

Typically, you send a check to the vendor just like any other deposit. However, the only difference in this transaction is that the check is an asset rather than an expense. Therefore, it is posted as ‘vendor deposits’ in your bookkeeping. A given amount will debit deposits held by others, and the exact amount will be credited to your bank account. Anyone can require a deposit, whether a utility company or a landlord. Making these entries on your financials will ensure that everything stays updated.

Returning the Prepaid Vendor Deposits

Vendors must return your deposits after a fixed period, and the most frequent way of doing that is through a check. However, if you are inclined to conduct further business with the vendor, they may adjust it to your next bill.CorpNet. Start A New Business Now

When the check is received, you deposit it into your bank account, balance out the equation, and make an opposite entry in your books. Your bank account will be debited, while the deposit account will be credited. If the vendor does not pay you back and caters for the deposit in your next bill, you must convert this asset into an expense in your books. The bills will be debited, while the agreed amount will be credited to prepaid vendor deposits held by vendors.

In a scenario where the applied deposit to the next bill is less than the total, you would have to write an open balance check, which is deposited to the appropriate expense rather than the deposits held by others.

Running a business requires you to be flexible and follow your industry’s standard norms because everyone else is doing that. Eventually, you will have to work with them. Maintaining good relations requires viewing such prepaid vendor deposits as an investment in building good relations rather than a burden on your finances.

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