How to Handle Vendor Deposits Paid in Advance in QuickBooks

By Kathleen Fernan // KNKBS Co-Owner

A situation you might encounter is that a vendor may request you to prepay for inventory purchases.The challenge is that you cannot put an item receipt or bill in the system as this will distort your inventory because you have not physically received it. This process will keep inventory balances correct and maintain an Asset Account that will hold all deposits paid, but not applied to inventory purchases until the inventory is received.


Overview of steps:

1. Set up an asset account called "Deposits Paid on Inventory"

2. Record initial deposits to the asset account

3. Create the PO for the vendor

4. Receive inventory

5. Receive the bill and offset Deposits Paid on Inventory account

6. Reconcile Deposits Paid on Inventory account


1. Set up an asset account called "Deposits Paid on Inventory"


-Go to Chart of Accounts

-Click "new"

-Under Account Type select "Other Asset" and continue

-Number the account according to your numbering system, if necessary

-Set account name as "Deposits Paid on Inventory"

-Save and close



2. Record initial deposits to the asset account


The initial deposit can be made on a check, bill or credit card. The key is that it does NOT go against the vendor's PO.

- Enter the check, bill or credit card and post the deposit to the Deposit Paid on Inventory on the Expenses tab. Be sure to reference the PO in the memo.

-Now go to the Chart of Accounts, click on the Deposits Paid on Inventory account and view the deposit transaction. It should be posted as an increase to the asset account.


3. Create the PO for the vendor

Create the purchase order for the vendor as usual, for the entire amount of the order. Do not include the deposit anywhere on the PO y


4. Receive inventory

Wait until you receive your order, then proceed to step 5.


5. Receive the bill and offset Deposits Paid on Inventory account

Create the bill for full receipt of the inventory. The bill will show the total amount owed. Now we will offset the bill with the deposit we paid.


Click on the expenses tab and enter the deposit. Note the amount is entered as a negative. When done click the recalculate button and the Amount Due at the top of the bill will net out the deposit.


When you open the Deposit Paid on Inventory account, it should show the initial deposit as an increase, and then the bill transaction is a decrease of the same amount.



6. Reconcile Deposits Paid on Inventory account

By reconciling this account, you will see which deposits are still outstanding. We will reconcile it to zero, which means we will clear only the deposits that have been fully applied.


-Go to the reconciliation center, or in Desktop, from the register, right click reconcile. Enter zero as the ending balance.

-Check both of the entries that you just made, which are for the same amount. Make sure the difference at the bottom is zero and click reconcile.

-Back in the register, both items will now have an R, or a check mark if in desktop, to show that they are offset. You can sort the register by cleared status and see all the outstanding deposits in one place.



Kathleen Fernan has spent over 40 years in the accounting industry and 20 years as a QuickBooks Advanced Pro Advisor. Kathleen’s company K&K Business Solutions, Inc. provides accounting conversions, troubleshooting, systems integration, procedural flow and training to small and medium sized businesses. In addition to her accounting background, Kathleen is an ACT! certified consultant and trainer. Contact KNKBS at the button below to reach Kathleen.


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