What exactly is a prepayment?
A deposit may be requested from either the buyer or the seller under certain circumstances. In such instances, you can send a prepayment invoice, often known as a prepaid invoice.
A prepaid invoice is a document used to record payments made in advance by suppliers or clients. It contains the amount to be prepaid on a sales order and allows you to invoice a client or seller's deposits.
Prepayments can be calculated as a percentage of the total purchase price or as a fixed amount.
What is the difference between a deposit and a prepayment?
These two ideas are not one and the same. A prepayment is an amount paid in advance by a buyer, whereas deposits are used to secure a transaction. As a result, an advance payment might be regarded as a prepayment. When a deposit is made, the payer loses control of the funds since they are locked in the receiver's account. At the same time, the payer retains ownership of the funds.
Examples of how to apply prepayments
Some goods and services require a buyer to pay the whole amount upfront in order for the goods or services to be delivered. Insurance is one such example.
Prepayment recording: cash and accrual accounting
If you use an accrual accounting system, a prepayment is recorded when a financial event happens, such as when a bill is sent, rather than when a payment is made. In the case of cash accounting, payment is recorded when a payment is made.
How to Make a Prepayment Invoice
If your business wants payment before delivering products and services, you should send prepayment invoices to your customers.
How does one go about creating a prepaid invoice?
One of the most common mistakes made by small business owners when sending an invoice is making two different invoices and manually calculating the remaining money to be paid on the final invoice.
The ideal method is to send out an estimate, followed by a prepayment invoice and a final invoice. When you use an invoicing system that automates this procedure, you may generate this documentation with a few clicks, while the total amount to be paid and a corresponding prepaid invoice are documented on your final invoice.
Using Blinksale to create a Prepayment Invoice
Let's look at how to make a prepayment invoice using Blinksale's online invoicing system.
- Create & Send a new Estimate.
- Once your customer has approved the estimate, click Generate Invoice. You will be taken to the Invoice page, where you can examine all of the data and make sure to add a note to the customer with whatever message (payment method) or agreement you want to communicate with prepayments.
- When done click Preview and Send Invoice.
- Your customer will get the invoice email and can add comments about how much he paid initially.
- Verify the payment and then click "Receive Payment" to record the initial amount. The system will automatically calculate the remaining balance and record everything under the Payments, History, and Comments section.
- Repeat Step 5 as soon as your customer is paying until the balance is zero.
- Re-send the Final Invoice without the remaining balance to close the transaction.
Final notes on prepayment invoicing
Businesses commonly use prepayment invoices to collect advance payments for goods and services before they are delivered. In certain circumstances, the prepayment is set at the entire rate—100%—and in others, it is just 30% or 50%. It is more convenient in each situation to streamline the process of generating and reconciling prepayment invoices with final invoices.
To make a prepayment invoice, use an online invoicing solution like Blinksale, which allows you to quickly create and deliver both prepayment and final invoices.
If you want to make a prepayment invoice, you may do so here for free.