Mastering Prepaid Vendor Deposits

Mastering Prepaid Vendor Deposits- Complete Controller

When you order a product or service from a vendor, the vendor might ask for a portion of the payment before the delivery. While managing the other accounting tasks, business owners often forget vendor obligations.

However, you must prioritize their demands and record the deposits accurately to maintain your books. It is because it is a mandatory payment and is called for serious attention. Ignoring these payments might cause late delivery of a product you need immediately. The prepaid payments have no potential loss, but recording all the transactions at the end of the year can be challenging.

ADP. Payroll – HR – BenefitsAre Prepaid Vendor Deposits Justified? 

Usually, businesses ask for upfront payments for the products and services to remove uncertainty. Primarily, you’ll make the payments partially, but you’ll make the payment in full after delivering the entire product. However, prepayments won’t be necessary if you have known the vendors for a long time and have a cordial relationship with them.  

The prepaid amount is written as paid in the accounts for the ordered supplies because it is your possession, and the vendor is just holding it for you until the products get delivered. Occasionally, the business must make a deposit on the equipment it is purchasing before shipping.

The company is trying to purchase from a new vendor for credit establishment. The business already has a credit history with a vendor who delivers products timely without asking for advance payments. There are numerous ways to account for prepaid vendor deposits, and the most intelligent way is to make a recording on a company’s balance sheet.

Download A Free Financial ToolkitThe Asset Portion

The asset column on a balance sheet shows items the company owns. The value of these items can be expressed in dollars or pounds. The asset column usually includes bank accounts such as savings or current accounts, account receivables, inventory, and equipment. Prepaid expenditures are also considered assets and might involve prepaid insurance, security deposits, rent, and prepaid inventory (referring to the deposit made on inventory but not yet received).

Temporary Assets

Temporary assets are usually defined as assets that will be utilized within a year. If the deposit belongs to an invoice that will be received and the payment is due to a vendor, a category for prepaid inventory will be created on the balance sheet under temporary assets.

Permanent Assets

Permanent assets are generally defined as assets having value beyond a year. Often, money is paid to the vendor that won’t be applied to current invoices. Instead, it is utilized as a security deposit against possible future non-payments. For such assets, the category for prepaid inventory will be created under permanent assets.

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When a deposit check is sent to the vendor, the accountant records the cash transaction on the balance sheet by crediting cash and debiting prepaid inventory. It will enhance the asset’s value and lessen the amount of available cash. If the check is utilized as a long-term security deposit, there’s nothing required until the money is applied against a final invoice.

When the deposit is applied against the vendor’s invoice, the accountant must credit the prepaid inventory account, including the balance with accounts payable. The balance of invoices must be paid in a similar way that bills are usually paid. If the cash is returned to the company, debit the cash account and prepaid credit inventory, reserving the original entry.

Returning the Prepaid Vendor Deposits

Vendors are obliged to return your deposited payment after a certain period, and the most frequent way to return is through a check. When the check is received, you transfer it to your bank account. This way, your bank account will be debited, and your deposited account will be credited.

Managing a business requires a flexible approach and involvement of standard norms of the industry. Inventory and merchandise are mandatory for any business venture; eventually, you’ll coordinate with tons of vendors along the way. Maintaining cordial relations with them is always beneficial, as prepaid deposits are an investment rather than a financial burden.

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