Customer prepayment invoices

2025-07-01

This article explains how to configure and process customer prepayment invoices.

Types of prepayment processes

Prepayment as a deposit

In this process, the buyer makes an initial partial payment to secure goods, services, or a contract. This partial payment is often referred to as a deposit. It's either a percentage or a fixed amount of the total value of the sales order. The prepayment invoice functions similarly to a billing document. The final invoice is issued later and reflects the full amount of the sales order.

Prepayment invoice as a tax invoice

In this process, the seller issues a real prepayment invoice to the buyer. This invoice includes sales taxes, if they are applicable. The buyer pays the invoice amount up front. Then, when the payment is completed, the seller can proceed with the delivery of goods or services. Later, the official invoice is sent out. The value of this invoice is the total outstanding amount, which is the difference between the total sales order value and the total prepaid amount.

This article explains how the Customer prepayment invoice feature should be configured and what the process looks like. In the first release, only scenario A is supported. Scenario B is planned on the product roadmap and will be available in a later release.

Example of a customer prepayment invoice

A customer places an order for $10,000 and agrees to pay $3,000 as a prepayment. The final invoice is issued after the goods and services are fully delivered.

The following accounting entries are recorded:

Prepayment invoice creation:
- Debit: Accounts receivable: $3,000
- Credit: Prepayment (Deposit): $3,000
Payment of prepayment invoice:
- Debit: Cash/Bank: $3,000
- Credit: Accounts receivable: $3,000
Apply the prepayment on customer invoice:
- Debit: Prepayment (Deposit): $3,000
- Credit: Accounts receivable: $3,000
Final customer invoice creation:
- Debit: Accounts receivable: $10,000
- Credit: Revenue: $10,000

In this example, the final invoice includes the total order amount ($10,000) and corresponding tax entries. The customer should pay the open amount, which is the total invoice amount ($10,000) minus the prepaid amount ($3,000), or $7,000. The entries ensure that the prepayment is correctly recorded and offset against the final invoice when the goods or services are delivered.

Set up Accounts receivable for customer prepayment invoices

To set up customer prepayment invoices, follow these steps.

Go to Feature management, and enable the Prepayment customer invoice feature.
Go to Inventory management > Setup > Posting > Posting > Sales order > Prepayment.
Set up the default ledger account for posting. Set the type to Customer prepayment.
Go to Accounts receivable > Setup > Accounts receivable parameters.
On the Updates tab, on the Invoice FastTab, in the Prepayment section:
- Select the Check mandatory sales order confirmation parameter to create a prepayment invoice only if the sales order is confirmed.
- Select the Synchronous prepayment settlement parameter to apply prepayments when invoicing sales orders without relying on the Automated prepayment settlement posting process automation job. Thus, improving real-time visibility and accuracy in financial reporting.
- Select the Sales category to determine the revenue account according to the posting settings.
On the Ledger and sales tax tab, on the General FastTab, in the Prepayment invoice section, in the Prepayment application policy field, select one of the following values:
- Notification – Prepayments are manually applied. If the prepayment isn't applied, you receive a notification when you create the final invoice.
- Automatic – Prepayments are automatically applied to the sales order if full payment is received and settles the prepayment invoice.
On the Number sequences tab, set up number sequences for the Prepayment invoice, Prepayment invoice voucher, Prepayment invoice reversal, and Prepayment invoice reversal voucher references.
Go to System administration > Setup, and select Process automations.
Select Initialize process automations.
Update the interval for the process automation to one minute.

If you use Electronic reporting (ER), follow these additional steps.

Open the Electronic reporting workspace, and select the Reporting configurations tile. Then, on the Configurations pages, on the Action Pane, select Exchange > Load from XML file.
Enable ER configurations.
Import the following files from Dataverse:
- Customer prepayment invoice model xml
- Customer prepayment invoice model mapping xml
- Prepayment invoice template xml
In the Electronic reporting workspace, in the Related links section, select Electronic reporting destination.
Select New. Then, in the Reference field, select Prepayment invoice template.
Select Settings to enable the different destinations for reports.
Select OK.
Select the Convert to PDF checkbox to print the file in PDF format.
Go to Accounts receivable > Setup > Forms > Form setup.
Go to the invoice and select the Prepayment invoice template in the dropdown list for the Prepayment invoice.
Save the page.

Overview of the prepayment invoice process

The process for customer prepayment invoicing includes the following steps.

Define a prepayment value on the sales order.
Confirm and post a prepayment invoice.
Settle the prepayment invoice.
Apply the prepayment invoice to the final invoice.

Create a prepayment proposal

When you create a sales order, you can define the prepayment amount by following these steps.

From the sales order, go to Invoice > Prepayment, and select Payment proposal.
Select the prepayment type:
- Percentage – If you select Percentage, the Prepayment value field is enabled. This field represents the percentage of the total sales order amount that is required as a prepayment. The Total prepayment amount field shows the calculated prepayment amount.
- Fixed – If you select Fixed, the Total prepayment amount field is enabled, and you manually enter the prepayment amount. The amount that you enter can't exceed the sales order amount.
In the Sales category field, select the appropriate sales category that determines the revenue account according to the posting settings. By default, the sales category is automatically populated with the value chosen in Accounts receivable parameters.

Generate a prepayment invoice

After the prepayment proposal is confirmed, generate the prepayment invoice by following these steps.

Go to Invoice > Prepayment, and select Prepayment invoice.
Review and post the prepayment invoice. The page shows information about the overall prepayment invoice, including the customer invoice account, posting and due dates, prepayment invoice number, prepayment status, and prepayment amount.
Select Post. The open customer transaction is created, and the status of the prepayment invoice is Pending.
After the transaction is posted, you can reverse this transaction using the Reverse transaction button on the action pane. You can select the Reversal posting date, Reason code, and Reason comment before the reversal is posted.

Settle the prepayment invoice

When you receive the payment for the prepayment, the customer payment journal is posted to settle the prepayment invoice amount. After prepayment invoice settlement, the status of the prepayment invoice is Received, and Apply prepayment is available.

Post the final invoice and apply the prepayment

From the Sales order, click Apply prepayment, in the Select prepayments to apply list, select the prepayment.
Select Apply prepayment.

After the sales order invoice is posted, the selected prepayment is applied to the invoice when the Automated prepayment settlement posting background process is successfully run. If Synchronous prepayment settlement is enabled in Accounts receivable parameters, this step happens in real-time.
The remaining amount of the sales order invoice can be settled through a customer payment journal and shows the outstanding amount. As the final invoice is issued, expande the Prepayment invoice FastTab to verify the application of the prepayment.