Xero has multiple ways of recording transactions that many users aren’t aware of. These are “Prepayment”, “Overpayment” and “Split Payment”. These transaction types are actually variations of the standard Spend/Receive Money bank transactions but they have very unique treatments. These transaction types allow you to record money received from a customer (or paid to a supplier) BEFORE an invoice has either been issued or received.
You access these from the Spend/Receive Money entry screens from the Manage Account menu, or simply by adding detail when creating a transaction from the bank reconciliation screen, with the default set as “Direct Payment”.
The prepayment function in Xero is specifically designed to manage the sales/purchase tax implications of receiving funds or making payments, particularly on the cash accounting scheme where the tax point is the date payment is received or made.
If you were to post funds received before an invoice has been raised as an overpayment, the balance paid would sit as a credit to the sales/purchase ledger until an invoice is available to allocate it to, therefore not accounting for sales/purchase tax, this is explained in more detail below.
When using a Prepayment you need to specify a ledger code. If you enter a P&L code here (such as sales) it will show up as revenue in that month (and then get reversed out when the final invoice is issued. If you do not want it to show as income then you should code it to a Prepayments (Balance Sheet) account. If sales tax needs to be reported on this transaction then you should ensure that you use the correct tax rate (if you do this regularly then you may want to change the default tax rate for the Prepayments account so you don’t forget to change it each time).
When you invoice for the job you should ALWAYS invoice for the full amount (as if the deposit hasn’t been paid) and charge the full sales tax. Then apply the Prepayment credit against the total invoice.
Overpayments are ideally suited for recording those times when your customer pays you twice, and you will hold the funds to be applied against a future (and unknown) invoice. Similarly this can be used when making payments on account to suppliers for expenses such as electricity which may be invoiced quarterly. You can not change the coding or tax treatment in any way. No revenue/expenses will be recorded, your Accounts Receivable/Payable balance will reflect that you owe or are owed the money where applicable. The payment will show up as a single line on the statement.
As long as you have no need to report this on a Sales Tax Return then this should be your default option.
Sometimes a customer may make a part payment against an invoice that you have issued, therefore the money received can not be matched up with the invoice in the receivables ledger. This scenario may also occur in the purchase ledger where you are gradually paying off an invoice received from a supplier.
When this occurs, a split payment may be applied to any given invoice acting as a part payment. Any split payments applied to an invoice can be clearly seen by drilling down into that invoice. Any payments applied will be listed below the total amount, which itself will be the outstanding balance remaining after these reductions.
To reconcile a part payment:
On the bank reconciliation screen, next to the bank statement line you want to reconcile, click Find & Match.
Click the Split link that appears next to the payment amount.
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