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 a common business practice to ask for upfront payments of certain products or services to minimize risk. The deposits are helping 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 in order for the products to be delivered.
The amount that 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 as “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. Deposits held by others will be debited by a given amount and your bank account will be credited by the same amount. 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 of time 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 just deposit it into your bank account and, to balance out the equation, make an opposite entry in your books as before. Your bank account will be debited while the deposits 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 account will be debited while the agreed amount will credit prepaid vendor deposits held by vendors.
In a scenario 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 the standard norms of in your industry because everyone else is doing that. Eventually, you will have to work with them and 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.
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