When you order a product or service from a vendor, it may ask you to pay a portion of the price before the actual delivery. Catering to prepaid vendor deposits can easily be ignored by the business among various other bookkeeping tasks for the day. You are required to 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.
The prepaid deposit has no potential loss, but it can become a task at the year-end to record these expenses because they have to be catered into bookkeeping.
Why are Prepaid Vendor Deposits Required?
It is common to ask for upfront payments of specific products or services to minimize risk. The deposits help for some time depending on the situation and are either returned or added to the credit balance. You may be required to make all or partial deposits, depending on the deal. 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 the past. 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 that you do not confuse them with your other accounts, such as prepayments on orders, liabilities, and retainers.
How to Account for Prepaid Vendor Deposits
Typically, you send a check to the vendor just like making 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 same amount will credit your bank account. Anyone can require a deposit, whether it is a utility company or a landlord. Making these entries on your financials will ensure that everything stays updated.
Returning the Prepaid Vendor Deposits
Vendors are required to 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.
When the check is received, you deposit it into your bank account and balance out the equation and make an opposite entry in your books as before. Your bank account will be debited, while the deposit account will be credited. In case the vendor does not pay you back and caters for the deposit in your next bill, you would have to convert this asset into an expense in your books. The bills will be debited, while the agreed amount will credit prepaid vendor deposits held by vendors.
In a scenario in which the applied deposit to the next bill is less than the total bill, 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 in your approach 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 you to view such prepaid vendor deposits as an investment in building good relations rather than a burden on your finances.About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks™️ file, critical financial documents, and back-office tools in an efficient and secure environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.