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:

• Added a prepayment.
  
• Creating the invoice.
  
• Applying the prepayment to that particular invoice.
  
• Getting paid by the customer for the remaining balance
  

Things to note:

• T-accounts is just a name for accounts that hold debits and credits.
  
• RRA is revenue received in advance and is a liability account
  
• The balance of the account shows the cumulative amount from the first step to the last. It’s the carry forward difference between the credit and the debit amount for the particular account.
  

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).

1. Creating Your Prepayment

——————————- |
| Cash | 55 | | 55 DR |
| GST | | 5 | 5 CR |
| RRA | | 50 | 50 CR |

1. Creating the Sales Invoice

——————————- |
| Sales | | 100 | 100 CR |
| GST | | 10 | 15 CR |
| Accounts Receivable | 110 | | 110 DR |

1. Applying the prepayment to the invoice that you created

——————————- |
| RRA | 50 | | 0 |
| GST | 5 | | 10 CR |
| Accounts Receivable | | 55 | 55 DR |

1. Getting paid by the customer for the remaining balance

——————————- |
| 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:

• The RRA account becomes an asset account called ‘Prepayments’,
  
• The sales account becomes an expense account called ‘Purchases’ – or what ever is appropriate for the expense, and,
  
• Account receivable becomes a liability account called accounts payable.