This guide outlines how to record a prepayment transaction in Xero before raising an invoice for a client or receiving a bill from a supplier.
Before proceeding: It is recommended to record client prepayments or deposits as a overpayment due to limitations associated with prepayments. Learn more here. Please consult with your accountant for the best practice for your business.
Steps to Create a Prepayment
Option 1: From Bank Accounts
If the statement line for the prepayment hasn’t yet appeared in your bank account in Xero, follow these steps:
Navigate to Accounting > Bank accounts.
Select the relevant bank account.
Click Manage Account > Receive Money or Spend Money.
Next to Received as or Spent as, select Direct Payment > Prepayment.
Enter the transaction details, including the applicable account (see "Which Account to Use" below).
Click Save
Option 2: During Bank Reconciliation
If the statement line for the prepayment has already come through to your bank account in Xero, follow these steps during reconciliation:
Navigate to the Bank Reconciliation screen.
Select the Create tab next to the relevant bank statement line.
Click Add details.
Next to Received as or Spent as, select Direct Payment > Prepayment.
Enter the transaction details, including the applicable account (see "Which Account to Use" below).
Click Save Transaction
Click Reconcile.
Which Account to Use for Prepayments
You can record prepayments in the account 2500-004 Customer deposit (current liability) account. Alternatively, you can record the amount received as an overpayment in the accounts receivable account. Please consult with your accountant for the best practice for your business.
Customer deposit account not appearing in your dropdown?
- Navigate to Accounting > Chart of Accounts
- Click on account name (e.g., "Customer Deposit").
- Tick the checkbox for Enable payments to this account.
