Prepaid Purchase Order - General Ledger Entry

This article explains the General Ledger (GL) entries created when you prepay a Purchase Order (PO) before receiving inventory, and then receive the goods and pay the remaining balance.

Overview

When prepaying a Purchase Order, the system creates accounting entries at each step:

1. Create Prepaid Bill - Record the prepayment to the supplier
2. Pay the Prepaid Bill - Disburse cash to the supplier
3. Receive Inventory - Recognize the inventory and apply the prepayment
4. Create Final Bill - Bill for remaining balance after receipt

Example Scenario

Purchase Order Details:

• Product: Widget A
• Quantity: 100 units
• Unit Cost: $10.00
• Total PO Value: $1,000.00

Prepayment: 30% ($300.00)

Step 1: Create Prepaid Bill (30% Prepayment)

When you create a prepaid bill from the PO for 30% ($300), the bill item is posted to the Supplier Prepayment account.

GL Entry when Prepaid Bill is Posted:

Explanation:

• Debit Supplier Prepayment: This is an asset account that tracks prepayments made to suppliers. The prepayment is recorded as an asset because the supplier owes you goods/services.
• Credit Accounts Payable: You owe the supplier $300 for this bill.

Step 2: Pay the Prepaid Bill

When you pay the prepaid bill via Payment Disbursement:

GL Entry when Payment is Posted:

Explanation:

• Debit Accounts Payable: Reduces the liability to the supplier.
• Credit Cash: Money leaves your bank account.

Running Balances After Steps 1 & 2:

• Supplier Prepayment: $300.00 (Debit balance - asset)
• Accounts Payable: $0.00 (Prepaid bill is paid)
• Cash: Reduced by $300.00

Step 3: Receive Inventory (Shipment Receipt)

When you receive the 100 units of Widget A, the system posts the shipment receipt and recognizes the prepayment that was made.

GL Entry when Shipment Receipt is Posted:

Explanation:

• Debit Inventory: The full value of inventory received ($1,000) is added to your inventory asset.
• Credit Supplier Prepayment: The $300 prepayment is applied, reducing the prepayment asset.
• Credit Pending Liability: The remaining $700 is recorded as a pending liability until billed.

Running Balances After Step 3:

• Inventory: $1,000.00 (Debit balance - asset)
• Supplier Prepayment: $0.00 (Prepayment fully applied)
• Pending Liability: $700.00 (Credit balance - liability)

Step 4: Create Final Bill for Remaining Amount

Create a bill linked to the shipment receipt for the remaining $700. When posted, the system reverses the pending liability and records the actual AP.

GL Entry when Final Bill is Posted:

Explanation:

• Debit Pending Liability: Reverses the pending liability recorded at receipt.
• Credit Accounts Payable: Records the actual liability to the supplier.

Step 5: Pay the Final Bill

When you pay the remaining balance:

GL Entry when Payment is Posted:

Summary of All GL Entries

Final Account Balances

After completing all steps:

Key GL Accounts Used

Supplier Prepayment Account

• Account Type: Asset
• GL Account Subtype: Supplier Prepayments
• Purpose: Tracks prepayments made to suppliers before goods are received
• Setup: Each supplier has a prepayment sub-account under the parent Supplier Prepayments GL account. This is set up automatically when you use the prepaid PO feature.

Pending Liability

• Account Type: Liability
• Purpose: Holds the liability for inventory received but not yet billed
• Setup: Configured in Setup → Entity Setting → Shipment Receipts → "Credited Account for New Shipment Receipts"

Accounts Payable

• Account Type: Liability
• Purpose: Tracks amounts owed to suppliers for posted bills
• Setup: Each supplier has an AP sub-account under the parent Accounts Payable GL account

Proportional Prepayment Distribution

When prepaying a PO with multiple line items, the prepayment is distributed proportionally across all lines based on each line's value.

Example: PO with 3 Lines

If you prepay $1,000:

Each line receives a proportional share of the prepayment rather than paying off lines sequentially.

Related Articles

• Posting a Shipment Receipt - General Ledger Entry
• Creating Bills from Purchase Orders
• Payment Disbursements

Troubleshooting

Supplier Prepayment Balance Not Clearing

If the supplier prepayment balance remains after receiving inventory, check:

1. The shipment receipt is linked to the correct PO line
2. The bill items are properly linked via Order Item Billing records
3. The shipment receipt has been posted

Prepaid Amount Exceeds PO Value

The system prevents prepaying more than the total unbilled amount on the PO. If you see this error, verify:

1. Previous prepaid bills haven't already covered part of the PO
2. The PO line quantities and prices are correct

Prepaid Purchase Order - General Ledger Entry

This article explains the General Ledger (GL) entries created when you prepay a Purchase Order (PO) before receiving inventory, and then receive the goods and pay the remaining balance.

Overview

When prepaying a Purchase Order, the system creates accounting entries at each step:

1. Create Prepaid Bill - Record the prepayment to the supplier
2. Pay the Prepaid Bill - Disburse cash to the supplier
3. Receive Inventory - Recognize the inventory and apply the prepayment
4. Create Final Bill - Bill for remaining balance after receipt

Example Scenario

Purchase Order Details:

• Product: Widget A
• Quantity: 100 units
• Unit Cost: $10.00
• Total PO Value: $1,000.00

Prepayment: 30% ($300.00)

Step 1: Create Prepaid Bill (30% Prepayment)

When you create a prepaid bill from the PO for 30% ($300), the bill item is posted to the Supplier Prepayment account.

GL Entry when Prepaid Bill is Posted:

Explanation:

• Debit Supplier Prepayment: This is an asset account that tracks prepayments made to suppliers. The prepayment is recorded as an asset because the supplier owes you goods/services.
• Credit Accounts Payable: You owe the supplier $300 for this bill.

Step 2: Pay the Prepaid Bill

When you pay the prepaid bill via Payment Disbursement:

GL Entry when Payment is Posted:

Explanation:

• Debit Accounts Payable: Reduces the liability to the supplier.
• Credit Cash: Money leaves your bank account.

Running Balances After Steps 1 & 2:

• Supplier Prepayment: $300.00 (Debit balance - asset)
• Accounts Payable: $0.00 (Prepaid bill is paid)
• Cash: Reduced by $300.00

Step 3: Receive Inventory (Shipment Receipt)

When you receive the 100 units of Widget A, the system posts the shipment receipt and recognizes the prepayment that was made.

GL Entry when Shipment Receipt is Posted:

Explanation:

• Debit Inventory: The full value of inventory received ($1,000) is added to your inventory asset.
• Credit Supplier Prepayment: The $300 prepayment is applied, reducing the prepayment asset.
• Credit Pending Liability: The remaining $700 is recorded as a pending liability until billed.

Running Balances After Step 3:

• Inventory: $1,000.00 (Debit balance - asset)
• Supplier Prepayment: $0.00 (Prepayment fully applied)
• Pending Liability: $700.00 (Credit balance - liability)

Step 4: Create Final Bill for Remaining Amount

Create a bill linked to the shipment receipt for the remaining $700. When posted, the system reverses the pending liability and records the actual AP.

GL Entry when Final Bill is Posted:

Explanation:

• Debit Pending Liability: Reverses the pending liability recorded at receipt.
• Credit Accounts Payable: Records the actual liability to the supplier.

Step 5: Pay the Final Bill

When you pay the remaining balance:

GL Entry when Payment is Posted:

Summary of All GL Entries

Final Account Balances

After completing all steps:

Key GL Accounts Used

Supplier Prepayment Account

• Account Type: Asset
• GL Account Subtype: Supplier Prepayments
• Purpose: Tracks prepayments made to suppliers before goods are received
• Setup: Each supplier has a prepayment sub-account under the parent Supplier Prepayments GL account. This is set up automatically when you use the prepaid PO feature.

Pending Liability

• Account Type: Liability
• Purpose: Holds the liability for inventory received but not yet billed
• Setup: Configured in Setup → Entity Setting → Shipment Receipts → "Credited Account for New Shipment Receipts"

Accounts Payable

• Account Type: Liability
• Purpose: Tracks amounts owed to suppliers for posted bills
• Setup: Each supplier has an AP sub-account under the parent Accounts Payable GL account

Proportional Prepayment Distribution

When prepaying a PO with multiple line items, the prepayment is distributed proportionally across all lines based on each line's value.

Example: PO with 3 Lines

If you prepay $1,000:

Each line receives a proportional share of the prepayment rather than paying off lines sequentially.

Related Articles

• Posting a Shipment Receipt - General Ledger Entry
• Creating Bills from Purchase Orders
• Payment Disbursements

Troubleshooting

Supplier Prepayment Balance Not Clearing

If the supplier prepayment balance remains after receiving inventory, check:

1. The shipment receipt is linked to the correct PO line
2. The bill items are properly linked via Order Item Billing records
3. The shipment receipt has been posted

Prepaid Amount Exceeds PO Value

The system prevents prepaying more than the total unbilled amount on the PO. If you see this error, verify:

1. Previous prepaid bills haven't already covered part of the PO
2. The PO line quantities and prices are correct