Common Ways to Handle Prepayments in Accounting in D365 Business central

When a customer pays you before you deliver goods or services — that's called a prepayment. You haven’t earned the money yet because the sale isn't complete. So, where do you put this money in your accounts?

That’s where Customer Prepayment Accounts come in.

💡 Two Common Ways to Handle Prepayments in Accounting:

1. Prepayments as a Liability (most common)

Why? Because the money received doesn’t belong to you yet. You owe the customer a product or service.

Example in Chart of Accounts: You create a Liability Account like “Customer Prepayments.”

What Happens in BC: When you deliver the product/service, Business Central automatically moves the prepayment amount from the liability account to the Revenue Account.

🔁 This is the default and standard accounting practice in many industries.

2. Prepayments as Prepaid Revenue (used in service companies)

Why? In professional services (like consulting), some companies record prepayments directly in the income statement as a special kind of prepaid revenue.

This may be a temporary revenue, or a different revenue classification.

📊 In Business Central, you can set up a G/L account from the Income Statement as the prepayment account, if this matches your company's accounting policy.

✅ In Short:

Most companies: Use liability account for customer prepayments.

Some service companies: Use income statement (revenue) account for prepayments.

Business Central: Supports both methods and handles the automatic transfer from prepayment to revenue once the sale is completed.

Thanks For Reading...!!

Regards,

Khushbu Rajvi