Here’s a table of the debits and credit flows for a prepayment in which you are receiving money for services/goods that you will deliver in the future. This table is good to see what happens in the back end of an accounting system. The example we’ll use is for a prepayment (revenue received in advance) of $50 + GST for an invoice of $100 + GST.
There are four stages:
Things to note:
Table of T-Accounts Showing the Flow of Debits and Credits with Prepayment and Applying this to a Sales Invoice (btw if you can’t see the table properly, I’ve also pasted an image below).
| Cash | 55 | | 55 DR |
| GST | | 5 | 5 CR |
| RRA | | 50 | 50 CR |
| Sales | | 100 | 100 CR |
| GST | | 10 | 15 CR |
| Accounts Receivable | 110 | | 110 DR |
| RRA | 50 | | 0 |
| GST | 5 | | 10 CR |
| Accounts Receivable | | 55 | 55 DR |
| Cash | 55 | | 110 DR |
| Accounts Receivable | | 55 | 0 |
Here’s the image:
What happens if the prepayment is the other way… so you’re paying for a deposit for venue hire. All that happens is that the debits and credits switch around and accounts would be different:
Next: What’s a Prepayment and the Types of Prepayment?