A returning question from our clients: how should they administer the prepayments made by their customers?
If we receive payment from our customer before we deliver the goods or render the services, it is not a revenue of the company yet, but a kind of liability, a credit from the customer. If the customer is Hungarian, we have to issue an invoice stating “advance payment” with VAT if applicable, and we pay the VAT as in case of a normal invoice. This invoice shows the day when we received the money as delivery date and the gross amount is what we received. The advance payment invoice is not a proforma invoice. A proforma invoice is like a payment notice, a call for payment we usually send to define the payment we expect. But a proforma invoice is not an official accounting document in Hungary. If the payment is received from abroad, and the deal will have no VAT, then our job depends on the nature of the deal. If the advance is for sale of goods, then we do not have to issue invoice about the advance payment. However, if we get a prepayment for services rendered later, we have to make an advance payment invoice, even if there in no VAT on it.
When the deal is closed and the delivery is done, we issue a normal invoice, but we show the deducted advance payment, and the final amount of the invoice will be the difference only – maybe zero. With this invoice we can book the whole amount as revenue for the company. We can deduct multiple advance payments or even part of payments in the final invoice.
In case of paying in advance to our suppliers, we are on the other side of the story with the same logic. The payment is not an expense yet, but a receivable claim until the delivery of the ordered goods or services. We should receive an advance payment invoice, and later a final invoice with reduced amount. Then the advance payment will become an expense item.
It is very important that a proforma invoice is not an official document but a kind of memo for the customer.
If you have any further questions, contact Leinonen. We can help your business with all its accounting needs and questions.
