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Prepayments for VAT cash accounting

Started by Darren Norton in Feature Requests | Idea

I really need the facility to accept prepayments (overpayments) from a customer and for it to sit on the client account as a credit. Not to allocate an invoice number to it as it is not a sale in the profit and loss account but to be included in the VAT return as a sale so the VAT can be picked up.

Otherwise I would not pay the VAT to HMRC until I raise an invoice which I believe is wrong.
Hi Darren,

If you don't want the Prepayment to impact the P&L, then simply code it to a Prepayments account on the BS (just make sure to set the correct VAT rate). When the PP is allocated to an invoice Xero will automatically create a reversing entry to offset the PP, even though a different code is used in the PP than in the real invoice.

The reason that Xero creates an invoice when you create a PP is because the PP is a taxable transaction (from a VAT perspective) and so an invoice may be necessary. It probably could be done differently, but the outcome would need to be the same. You can override the invoice number with a new ref number if you want so that it doesn't look like an invoice on the customer statement.

But the only way to have it effect the Acc Rec balance and VAT is to use the PP type.

Peter.
I offer live remote Xero support. I am a Xero Certified Advisor and Xero's award winning Most Valuable Professional. I support small businesses in NZ with professional accounting services and offer paid Xero support and implementation advice to clients all over the globe. Get a Xero MVP on your team! I'm an NZ and Canadian Chartered Accountant, business advisor and add-on Developer.
Visit my blog for various Xero articles.
 

Peter McCarroll

I've tried setting this up but doesn't seem to work properly. It still picks up the PP without the VAT for cash accounting.
How would you set this up please?
Thanks
Darren
 

Darren Norton

I am in Washington State (USA). We are photographers who require a prepayment deposit in advance of the wedding. I confirmed last week with the state that we are required to pay the sales tax at the date of delivering the product (possibly a year or more from now, for us), not when receiving the prepayment. I'm confused on how to get Xero to process it this way. I'm thinking I might have to change it from invoices to quotes? Xero is not making this easy, and the bookkeepers (Xero certified) don't seem to know these rules, just how to make reports. Also, Xero seems very hard to use in general for cash-based accounting businesses.
 

Candice Hoyt

Oh, and if I go to send a "statement" to my client, it only shows the final invoice amount, and does not show the prepayment.
 

Candice Hoyt

HI Candice,

Prepayments and Overpayments work quite differently.

A prepayment posts to a (non-AR) ledger account and accounts for Sales Tax. Because of this it does not create an entry in the AR balance, but does have a notational record. When the PP is "applied" to an invoice the original PP record is reversed (in a way) and the prepayment amount is now allocated as a payment against the new invoice. It is a bit confusing. To be honest, I think it could have been implemented better. The reason this type of transaction is necessary is for jurisdictions (like NZ and AU) where Sales Tax must be reported on the earlier of the invoice date or cash payment date. If you were in NZ then you would need to pay the implied GST component of the deposit to the government in the reporting cycle that it was received in.

An Overpayment is much more straight forward. It simply creates a credit in the AR account as an unapplied payment. It does not code anything to other ledger accounts and and does not account for Sales Tax. It shows up on the AR statement. The OP can then be applied to any future invoice.

So, in your case, given that you do not have to account for WA sales tax on these deposits until the final invoice is paid, you need to do either:
- code the deposit as a PP to a Prepayments account (no Tax). This will not show up in the AR ledger. When you issue the final invoice you can add a final coding line "less deposit received" -$500 Prepayments.
- code the deposit as an OP to the AR account and then apply the credit to the final invoice when it comes in
- create 2 invoinces: one for the deposit (no tax) and the second for the full amount (with tax) less the deposit (no tax) already received.

I hope that makes sense.

Peter.
Xero Certified Advisor, Canadian CPA & New Zealand CA and Xero's award winning Most Valuable Professional. I give implementation advice to clients all over the globe. Get a Xero MVP on your team! Visit my blog for various Xero articles.

You can book a live remote Xero support session with me for a very reasonable price.
 

Peter McCarroll

I've been disappointed with the way that xero deals with payments received on account for quite a while. It just makes no sense when using cash accounting for vat and don't want to raise an invoice for every amount received. shame really as i think xero is a very good product but would cause us all sorts of issues.
 

Darren Norton

This is causing a major problem for us. Throw on a GoCardless fee on the monthly Direct Debit and the headache gets worse!
 

Jonathan Hughes-Deane

We were considering switching from Sage 50 to Xero for the firms books. The prepayment issue has stopped us doing this as the creation of an invoice for a prepayment and the odd way of accounting for this just makes no sense. If on cash accounting and receiving POA's there is a potential to make a right mess up of the VAT returns.
 

Darren Norton

Folks - keep in mind that the creation of an "invoice" is merely a mechanical issue here - it doesn't mean that you need to send this out. The issue here is when does the VAT/GSTable transaction occur. In this case it is on receipt of the cash, even though the revenue hasn't been recorded yet (if revenue is to be recorded then you should have issued an invoice in the first place). So creating an "invoice" on receipt of cash is (in many jurisdictions) technically the correct response.

Xero needs to create a transaction for the payment that is attached to the contact's account. A standard Receive Money (Direct Payment) transaction is not enough, and an normal invoice is not yet warranted. Hence the Receive Money (Prepayment) type was born. It is ONLY intended the payment is for a not-yet-issued invoice AND you need to record the Sales Tax on receipt. If you never intend to issue an invoice, then just do a normal Receive Money (Direct Payment). If the invoice is going to be issued in the same month then just treat it as an Overpayment and apply to the proper invoice as soon as it is issued.

While I agree that it could have been implemented better, I'm sure that the Xero team would appreciate more information on why this is a "major problem" (@Jonathan) or could "mess up the VAT returns" (@Darren).
 

Peter McCarroll

I haven't used the prepayments function for a while in Xero as I became very frustrated with it. From an accounting point of view, if I receive a payment in advance then this is what i want:
- VAT to be included on the VAT return when money is received.
- The customer to be in credit on their account when I run the monthly debtors run.
- Not to be included in sales as far as accounts are concerned as it isn't sale it is a payment on account.
-I don't want meaningless invoices to be created for the overpayment as when I then look at the client transactions it has invoices that will make no sense to clients.

From memory I cannot have this. Sage deals with this very easily. Doesn't create dummy invoices, shows the client in credit as they should be, shows it as a sale for VAT but not for accounts.
I just can't understand why Xero deals with it in this way whereas Sage on this part is spot on.

When I ran some dummy figures through Xero for prepayments it didn't show the VAT on the VAT return, I probably set it up incorrectly to be fair but then it should just do it without having to manipulate codes etc. When I eventually had it to show as a sale for the VAT, the client debtor run didn't show them in credit which is no good.
 

Darren Norton

Darren is correct. This happens to me too.
Of course... I could come up with a work-around but that's not the point.
There must be an easier way?
Come on Xero... I have faith that you can correct this oversight!
 

Jonathan Hughes-Deane

I'd like to add my voice to this. My client uses Cash Accounting for VAT and I am in the process of converting them from Sage. For payments on account (usually where the client has overpaid in error, and it's more likely that they will use it against a future invoice than me return it to them) I've found that using a prepayment, replacing the invoice number with "POA *DATE*", coding it to the balance sheet 'prepayments' and changing the VAT to 20% on income, does seem to work from a VAT perspective. It appeared in the VAT return as expected which was my main concern.

It doesn't, however, appear on the statements which is a bit annoying. I'm assuming because the nature of a prepayment in the Xero sense is that it's in advance of issuing an invoice, and the minute an actual invoice is issued you would want to allocate it. However from my point of view, if a customer overpaid and needed to reduce their next payment, I would want them to see it and actively 'take' the credit, rather than me allocate it for them with no visible record that I had done so.

It's not the end of the world, just a bit annoying. I agree that Sage did handle this quite well, but the benefits of using Xero outweigh the odd drawback.
 

Liz Fisher

This issue has stopped us seriously looking at moving from Sage. We have lots of clients who pay in advance at some point in the year and so the silly workarounds for us would just confuse things.
As you said, you can get the amounts received to show on the VAT return but not on the client account. Also why it's shown as a sale is beyond me as it's not a sale.
Rant over :-)
 

Darren Norton

Not every system works for every company I guess. This is a minor enough issue for me that I will do whatever I need to do to make it work. As Xero expand, and they hear a similar thing from more people then it will naturally move up the queue to be looked at. I think the reason people get so annoyed is that Xero works so well for other things that's they're crushed when it doesn't meet their high expectations! :-)
 

Liz Fisher

I've been waiting for over 2 years for something to change with the prepayments but still waiting.
Maybe in other countries, the way that xero works is correct. In the UK it doesn't, which is a shame.
Nevermind, we will continue with Sage for now.
 

Darren Norton

May I add that I have juts come across this too. The immediate effect of having bank feeds we see the payment first before any documents - with cash accounting this can get messy if not watched like a hawk! I hope something will come of this Xero
 

David Beck

I can still not see any progress on this point. 3 years later and a fundamental issue has still not been resolved.
 

Darren Norton

Slightly worrying. In the wrong hands i.e. Non trained bookepers which seems to be more and more of Xero users. This oversight could have people under declaring vat. Saying that I always found the way sage did it annoying too and you needed to know the vat treatment before you has the document. So Xero's solution is much better for me but as I say you need to know what you are doing!
 

David Beck

I'm surprised that you say that Sage was annoying. To me it's by far the simplest way of accounting for VAT on prepayments. When you say that you need to know the VAT rate before hand, most of the time this should be straight forward. 99.9% of our fees would be @ 20% so simple.
Xero is miles better with the bank rec etc but this is just such a weakness.
 

Darren Norton

As a weekly newspaper in the US, the vast majority of transactions are not subject to sales tax, only income tax on profits. Most of the revenue comes from advertisers, and there are one or two who will pay in advance for the year - but then others will double pay a bill by mistake and want the amount applied to their accounts and credited to future invoices. This is where the problem comes in. If someone simply prepays an amount, I assign it to the invoice(s) owed at the time and the overage shows as a credit on the account, but when someone sends in a second check for one invoice, there is no way to simply put the amount 'on account.' It would really be nice to have a simple 'payment on account' category so these transactions show up on customer accounts and statements as either prepayments or credits on their account, rather than 'overpayments.'
 

Linda Stevenson

I've just started a Twitter campaign to get more votes on this.
Please share: https://twitter.com/WA_Accountants/status/973485586328772609
 

Jonathan Hughes-Deane

Good luck. This problem has been ongoing for years.
 

Darren Norton