Practical example recording prepayments: German legislation

Sage Active allows you to easily record all journal entries related to advanced payments that took place before the creation of the invoice they are related to.

These prepayments can be recorded for collections from your customers as well as for payments owed to your suppliers.

In this article you will find a practical example recording the prepayment amount excluding tax on the prepayment ledger account. This demonstrates recording the journal entries and also registering the amounts for tax returns and open items.

The example describes a customer doing a prepayment of 600€ for an invoice with a total amount of 1500€ (19% VAT).

This happens as follows:

• You record the 600€ prepayment.
• After verifying your bank account, you record the collection of the 600€ prepayment.
• At the agreed date, you record the actual invoice with the total amount of 1500€.
• After the creation of the invoice, you cancel the prepayment.
• After collecting the remaining amount for the invoice, you record it in your bank account.

The journal entries for each of these steps are described below.

Recording the prepayment

Recording the journal entry for the prepayment starts in the usual way:

1. Create a new invoice journal entry.

   Accounting > Journal entries

2. Add and complete the first entry line using a clearing or intermediate ledger account for advanced payments and the amount collected from the customer.
3. Add the second entry line and select the Customer prepayment ledger account.
4. If the prepayment ledger account is not configured with a Tax code, choose a Tax and Tax treatment from the side panel.
   The split in taxable amount and VAT amount happens automatically.
5. Select a Third party for the prepayment entry line..
6. Save the journal entry

The resulting journal entry looks like this:

The VAT amount for the prepayment is registered in tax return for the month you record the prepayment in.

Recording the prepayment collection

Recording the journal entry for the prepayment collection starts in the usual way:

1. Create a new financial journal entry.

   Accounting > Journal entries

2. Add the Customer ledger account and complete the Third party and the amount collected from the customer.
3. Add the second entry line and select Bank or Cash ledger account.
4. Save the journal entry.

The resulting journal entry looks like this:

Recording the invoice

Recording the journal entry for the invoice with prepayment starts in the usual way:

1. Create a new invoice journal entry.

   Accounting > Journal entries

2. Choose a Revenue ledger account for the first entry line.
3. If the revenue ledger account is not configured with a Tax code, choose a Tax and Tax treatment from the side panel.
   The chosen Tax and Tax treatment must be the same as used for the prepayment.
4. Add the taxable amount for the invoice to the revenue line.
   The VAT line is recalculated accordingly.
5. Add a line for the Customer ledger account and add the Third party.
6. Save the journal entry.

The resulting journal entry looks like this:

Cancelling the prepayment

Recording the journal entry for the cancellation of the prepayment starts in the usual way:

1. Create a new invoice journal entry.

   Accounting > Journal entries

2. Add and complete the first entry line using the clearing or intermediate ledger account for advance payments from the previous journal entry and the amount collected from the customer.
3. Add the second entry line and select the Customer prepayment ledger account.
4. If the prepayment ledger account is not configured with a Tax code, choose a Tax and Tax treatment from the side panel.
   The chosen Tax and Tax treatment must be the same as previously used for the prepayment.

   The split in taxable amount and VAT amount happens automatically.

5. Select a Third party for the prepayment entry line.
6. Save the journal entry.

The resulting journal entry looks like this:

The VAT amount for the invoice and the cancellation journal entry are registered in the tax return for the month you record them in.

Recording the invoice collection

The journal entry for the collection of the remaining amount for the invoice can be recorded and matched like a standard financial journal entry.