A customer pre-payment represents a value in sales for which the business is liable to supply the customer, so pre-payments are recorded as a liability to the company.

To create the new Liability account:

1. Go to the Lists menu and choose Accounts.
2. Click the Liability tab.
3. Click New. The Account Information window appears (the Edit Accounts window in older versions).
4. Enter the new account's details as shown in the following example. The account number may vary depending on your account.
   
5. Click OK.

To enable the pre-payments to be recorded, and for automating the general ledger postings, two inventory items need to be created. These items are also used for reporting the pre-payment balances.

To set up a new item for tracking pre-payments:

1. Go to the Lists menu and choose Items.
2. Click New. The Item Information window appears.
3. Setup the item as per the example shown below.
   
4. Click the Selling Details tab and specify the Tax Code When Sold. Speak to your accountant or the ATO if unsure about the applicable Tax Code to use.

5. Click OK. Referring to the above example:

   • Select the I Sell This Item option only (not applicable for BusinessBasics or AccountRight Basics).
   • Select the new Liability account in the Income Account for Tracking Sales linked account field - this will be the account created earlier in this support note. You will receive a warning regarding the type of account selected. Click OK and disregard the message.

1. Go to the Lists menu and choose Items.
2. Click New. The Item Information window is displayed.
3. Setup the item as per the example shown below.
   
4. Click the Selling Details tab and specify the Tax Code When Sold. Speak to your accountant or the ATO if unsure about the applicable Tax Code to use.
5. Click OK. Referring to the above example:

• • Select the I Sell This Item option only (not applicable for BusinessBasics or AccountRight Basics).
  • Select the relevant Income account in the Income Account for Tracking Sales linked account field. You may need to create this account if it doesn't already exist.

In this example, we will assume a business sells piano lessons in hourly blocks, and students need to pay for 5 hours in advance. The business has setup an item named Pre-paid Lessons (hours) to record the pre-payment.

Enter and record the pre-paid hours using an Item Invoice as per the sample sale below.

As the customer uses their pre-paid service, the pre-paid units and its liability need to be reduced. In addition to this, the income for the service which has been provided needs to be recorded.

All this is done by recording another Item Invoice for a negative quantity of the pre-payment item, and a corresponding positive quantity for the income item.

The following window shows a sample of the transaction.

Referring to the above example:

• The customer has used 2 of their pre-paid hours, so the balance of the pre-paid hours is reduced by selling -2 pre-payment items. This will also post a debit to the item's linked Liability account, reducing the company's liability to the customer.
• Selling a positive quantity of the income item (in this example Hourly Piano Lessons) will record the income for the service that has been provided to the customer.

1. Go to the Sales command centre and click Reports.
2. Click to highlight the Sales [Item Detail] report (under the Item sub-heading).
3. Click Customise or Display (based on your software version).
4. Select the pre-payment Item from the Items drop down menu.
5. Click the Sale Status drop down menu and select Closed Invoices, then enter the date range to capture the Item sales for the customer.

The window on the following page shows the Sales [Item Detail] report.

The report shows that:

• 5 pre-paid hours were purchased on the 31/07/2012.
• 2 hours were used and have been invoiced on the 15/08/2012.
• There is a balance of 3 pre-paid hours resulting in a Liability of $135.00.