Paying a supplier before they deliver gives you a right to the goods or services, or to your money back. Until delivery, that right is an asset. It should sit on the balance sheet in its own account, often named deposits paid to suppliers or supplier payments on account, rather than going straight to an expense or a fixed asset account.
Not the same as a prepaid expense
The word “prepayment” covers two different things in UK bookkeeping, and they need different accounts.
| Deposit paid to a supplier | Prepaid expense | |
|---|---|---|
| What has happened | Money paid, nothing supplied yet | Invoice received for a service that runs past the period end |
| Example | 50% up front on a new coffee machine | Annual insurance paid in October, year end in December |
| How it clears | Against the supplier’s final invoice | Released to expense month by month |
| Typical account | Supplier deposits | Prepayments |
Prepaid expenses are a period-end adjustment covered in accruals and prepayments bookkeeping. This page deals only with money handed over ahead of a supply.
Paying deposits
A café orders an espresso machine for £9,000 plus VAT. The supplier asks for half up front and emails a pro forma invoice for £5,400.
A pro forma is not a VAT invoice. It is a request for payment, and you cannot reclaim VAT on it. So when the café pays, the full £5,400 goes to the deposit account:
| Account | Debit | Credit |
|---|---|---|
| Supplier deposits | £5,400 | |
| Bank | £5,400 |
Receiving the payment creates a tax point for the supplier, who should then issue a VAT invoice for the deposit. When it arrives, showing £4,500 plus £900 VAT, move the VAT out of the deposit account:
| Account | Debit | Credit |
|---|---|---|
| Input VAT | £900 | |
| Supplier deposits | £900 |
The deposit account now holds £4,500, the net amount paid ahead of delivery. If the supplier issued a full VAT invoice before you paid, you could post it straight away instead; the point is that the claim follows the VAT invoice, not the payment. The details an invoice must show before you rely on it are listed in VAT invoice requirements.
Clearing against the final invoice
The machine is installed and the supplier sends the final VAT invoice: £9,000 plus £1,800 VAT, less the £5,400 already paid, leaving £5,400 due. Only the VAT not already reclaimed (£900) is new. Because the machine is a fixed asset, the full cost goes to plant and equipment:
| Account | Debit | Credit |
|---|---|---|
| Plant and equipment | £9,000 | |
| Input VAT | £900 | |
| Supplier deposits | £4,500 | |
| Trade creditors | £5,400 |
Paying the £5,400 then clears the supplier account in the usual way.
Some software handles deposits as a payment on account in the purchase ledger: the supplier’s account goes into debit, and the final invoice is allocated against it. That works well when the invoice is weeks away. For long-lead orders, capital purchases and anything spanning a month end, a separate nominal account is easier to review, and it keeps trade creditors honest. If you do use payments on account, any supplier left in debit at year end should be moved out of creditors and into debtors.
Where the asset is shown
The Companies Act balance sheet formats put supplier deposits in different places depending on what they are for:
- Stock and materials: within stocks, as payments on account
- Fixed assets being bought or built: within tangible fixed assets, as payments on account and assets in course of construction; larger projects may use a fixed assets in the chart of accounts account
- Services and everything else: within debtors, as other debtors or prepayments
A single ledger account is fine during the year. Analyse it at year end so your accountant can present it correctly.
When the deposit is lost
Sometimes the goods never arrive. The supplier goes out of business, or you cancel and the terms say the deposit is non-refundable.
If you expect nothing back, write the deposit off:
| Account | Debit | Credit |
|---|---|---|
| Loss on supplier deposits (administrative expenses) | £4,500 | |
| Supplier deposits | £4,500 |
For a supplier in insolvency, register a claim with the insolvency practitioner first, and write off only the part you do not expect to recover.
The VAT needs separate thought. If the supplier issues a credit note, reduce your input VAT by the VAT shown on it. If you reclaimed VAT on a deposit invoice and no credit note will ever come because the supplier has collapsed, ask your accountant whether an adjustment is needed before the next return, rather than leaving the claim untouched or reversing it by default.
Checks for each month end
- List every open deposit with supplier, date paid, amount, VAT status and expected delivery.
- Confirm a VAT invoice exists for every deposit where input VAT has been claimed.
- Chase the final invoice for anything that has been delivered; the deposit should not outlive the delivery.
- Treat anything past its expected delivery date as a warning sign about the supplier.
Staged payments to a supplier against an invoice already received are a different situation, covered in partial payments to suppliers.