Dax365FO

Architectural perspective

Globally, two alternative methodologies exist to post a vendor prepayment: 1-directly post an advance payment or 2-post the prepayment invoice. Each company chooses the best path based on fiscal and business requirements present in its own localization. Below, we can find a quick description of the two alternatives.

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Prepayment invoice

In some countries, receiving a prepayment without an invoice document is illegal. That because:

1. The invoice legally certifies and legitimizes the due amount. In other words, in case of contestation, it’s the document to present to the court to certify that a debit was not played.
2. The sales tax should be applied already in the prepayment process. So, it’s considered tax evasion to do a pre-payment without an invoice

Furthermore, from the accountant’s perspective, we usually want to separate the prepayment balance account from the current one. Here is the presentation of the accounting matrix related to this case:

Event	Main account	Type	Debit	Credit
Prepayment invoice	Vendor advance payment	Balance sheet		122
Prepayment invoice	Prepayment	Balance sheet	100
Prepayment invoice	Sales tax receivable	Balance sheet	22
Prepayment	Vendor	Balance sheet	122
Prepayment	Bank	Balance sheet		122
Prepayment compensation	Vendor	Balance sheet		122
Prepayment compensation	Vendor advance payment	Balance sheet	122
Vendor invoice	Vendor	Balance sheet		510
Vendor invoice	Cost	Profit and loss	500
Vendor invoice	Prepayment	Balance sheet		100
Vendor invoice	Sales tax receivable	Balance sheet	110
Vendor payment	Vendor	Balance sheet	510
Vendor payment	Bank	Balance sheet		510

In Dynamics 365FO, the out-of-the-box function is more adequate for the business process, where we want to track a prepayment related to a specific purchase order. Indeed, we consider the prepayment to be dedicated to a specific order, so it’s mandatory to have the purchase order inserted into the system.

We can see this link for a deep-dive dynamics solution explanation: https://daxmsdynamics365.wordpress.com/2024/03/22/vendor-prepayment-invoice-feature/

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Advance payment

In some countries, you are allowed to make a prepayment without the invoice. Fiscally speaking, it’s enough to declare the sales tax in the current invoice. The business can adopt this process because it’s leaner and faster than the prepayment invoice.

Furthermore, as for the prepayment invoice case seen previously from the accountant’s perspective, we usually want to separate the prepayment balance account from the current one. Here is the presentation of the accounting matrix related to this case:

Event	Main account	Type	Debit	Credit
Prepayment	Vendor advance payment	Balance sheet	100
Prepayment	Bank	Balance sheet		100
Vendor invoice	Vendor	Balance sheet		610
Vendor invoice	Cost	Profit and loss	500
Vendor invoice	Sales tax receivable	Balance sheet	110
Vendor compensation	Vendor	Balance sheet	100
Vendor compensation	Vendor advance payment	Balance sheet		100
Vendor payment	Vendor	Balance sheet	510
Vendor payment	Bank	Balance sheet		510

In Dynamics 365FO, we recommend that the process be more adequate for the business process where we do a generic prepayment but do not know the purchase order explicitly involved. In a second moment, we will match the prepayment with the purchase order inserted. In other words, the presence of a purchase order is not mandatory.

We can see this link for a deep-dive dynamics solution explanation: https://daxmsdynamics365.wordpress.com/2024/03/21/vendor-direct-advance-payment/