Prepayments in Business Central

Prepayments in Business Central handle the accounting for invoices issued or received before the goods are delivered or services rendered. Deposit on a sales order, advance to a vendor, milestone billing tied to an order — all are prepayment scenarios. The mechanism is well-defined but unfamiliar to anyone who has only seen simple post-and-pay systems.

The business problem

A customer places an order worth 100,000. Terms require 30% on order (a deposit) and 70% on delivery. Without prepayment functionality, you'd post a separate manual invoice for 30,000, then later post the full 100,000 sales invoice, then somehow reconcile the two. Prepayments build this into the order processing flow.

Setting up prepayments

Each sales and purchase line carries a prepayment % field (defaulting from the customer/vendor or set per line). Prepayment posting accounts — separate from regular sales/purchase accounts — are configured in the general posting setup: Sales Prepayments Account (a balance-sheet liability for prepayments received) and Purchase Prepayments Account (a balance-sheet asset for prepayments paid).

The prepayment invoice

From a sales order with prepayment % set, the user issues a prepayment invoice. Business Central calculates the prepayment amount (sum of line × prepayment %), posts it to the Sales Prepayments Account (rather than a revenue account), and creates a customer ledger entry. The customer is invoiced, can pay, and the payment is recorded as a normal receipt against the prepayment invoice.

The final invoice

When the goods ship or the service is delivered and the final sales invoice posts, Business Central recognises the full revenue, then reverses the previously-posted prepayment from the Sales Prepayments Account, so the net effect is correct: revenue recognised on delivery, no double-counting of cash.

Partial deliveries

Both prepayments and final invoices can be partial; the prepayment amount remaining is tracked per line and consumed proportionally as the final invoice posts.

Purchase prepayments

The mirror image. A purchase order with prepayment % triggers a prepayment invoice received from the vendor, posted to Purchase Prepayments Account. When the goods receipt happens and the final invoice posts, the prepayment is reversed.

VAT

Prepayments are VAT-relevant. Prepayment invoices include VAT at the prepayment rate; the final invoice reconciles the VAT correctly. Country localizations vary on the exact VAT treatment — verify per country.

Common pitfalls.

• Mixing prepayment and non-prepayment lines on the same order is supported, but adds complexity. Keep simple where possible.
• Cancelling a prepayment invoice before the goods ship requires reversing the prepayment and the related receipt; not difficult but rarely done, so users need training.
• Foreign currency prepayments with FX revaluation between prepayment and final invoice produce additional FX gain/loss entries; configure FX revaluation routines to include the prepayment accounts.

Statutory uses

In several jurisdictions, prepayment invoices are statutorily required for any payment before delivery. Configure prepayment % accordingly.