Direct payments, prepayments and overpayments are a form of money flow. They can be money flows into the business (money received) or money flows out of the business (money out). Here are the differences and also why they need to be reconciled:

1. Direct Payment or Direct Receipt – is when a payment is received or made directly via cash or cheque. The cash that’s received will ultimately be deposited into the bank account as the cheque that’s received. It works the same way. The cash that’s been spent will often have to be taken from the bank account as the cheque that’s written out to pay someone. Therefore, a direct payment or direct receipt needs to be reconciled to the bank statement lines. To create a direct payment or direct receipt:
   • Go to Accounts > account > bank > new > spend money/receive money and it should default to "Spend as Direct Payment/Receipt.
   • Then fill in the details as if you were filling out an invoice/bill.
   • Once done, click Save.
2. Overpayment is when too much money has been paid for something or when someone has paid you too much for something. You create a receive money/spent money and then reconcile it to the portion of the bank statement line that represents that overpayment. That overpayment can then be applied to a future invoice to reduce it. Here’s how to create an overpayment in Xero.
3. Prepayment is when money has been paid upfront for something. There’s a separate post on this. You have to reconcile a prepayment to a bank statement line because if someone is depositing money for a prepayment, you should track this. Here’s how to create a prepayment in Xero.