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Recording Prepaid Inventory in QuickBooks

You have placed an order with your vendor for inventory.  Your vendor requires either payment in full or a deposit (partial payment) before shipping the inventory to you.  How do you record this transaction in QuickBooks?  You don’t want to Receive Inventory because you don’t want your inventory quantities to show inventory that you don’t have.  What you want to do is show that you have prepaid for inventory and show a credit for the vendor you purchased the inventory from.

Go to Write Checks on your Home Page.  Enter the vendor name, date, and the amount.  Under the Expense tab click on Prepaid Inventory.  You may need to set this account up in your Chart of Accounts.  If so, add this account as an Other Current Asset type of account.  Enter the amount you are paying.  Use the description field to make notes on what this is for.  Click Save and Close.

When your inventory has arrived, go to Receive Inventory > Receive Inventory With Bill.  Enter the Vendor name, the date and a zero ($0.00)* for the dollar amount.  On the Expense tab click on Prepaid Inventory and enter the amount that you paid for the order as a negative dollar amount.  Click on the Item tab and enter all the items in this order and the amount as a positive dollar amount.  The negative and positive added together will equal the zero dollar amount of the bill.   Click Save and Close.

You are through with this transaction.  The transactions for the Vendor in the Vendor Center will show the check that was written and the bill that was created.  The Vendor balance will be zero (0.00).  The inventory balance will have increased by the amount you paid and the inventory quantity will be increased by the quantity you entered.

*If you made a deposit for the inventory rather than paying it in full you would enter the amount you still owed on the bill.  Under the expense tab you will enter the amount you prepaid as a negative dollar amount.  Under the item tab you will enter the total amount of the inventory you received.  Both of these amounts added together will equal the amount of the bill.

If you have entered a purchase order before you write a check, choose “no” on the pop up message that you have outstanding purchase orders.  After you have received your order and go to Receive Inventory with Bill, in the Enter Bill window click on Select PO at the bottom left of the window.  Pick the PO that you are receiving inventory for.  Enter the rest of the information as described above.

Before writing this article I researched this topic and tested several different ways to record a prepayment of inventory.  I found this method to be the simplest.  Please feel free to comment, make suggestions or ask questions.


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About Jo Ellen Peters

Jo Ellen Peters is the owner of Top Notch Bookkeeping and an Advanced Certified QuickBooks ProAdvisor. She has over 20 years experience in bookkeeping and payroll, with 14 years at a CPA firm working for clients in a variety of industries. She attended college at Marshall University in Huntington, WV, is a member of the American Institute of Professional Bookkeepers and is a Certified Quickbooks Consultant for The Sleeter Group.

11 Responses to Recording Prepaid Inventory in QuickBooks

  1. To record a prepayment of inventory is not an easy thing. Thanks for your tips, which will be very useful for me.

  2. Patti Almonte says:

    Thanks for this post, Jo Ellen. I was struggling with it because I hadn’t set up the current asset account for prepaid inventory. Thanks for figuring out that piece of the puzzle.

  3. Susan Chirico says:

    I found this very helpful. I need just a little more guidance. I prepay inventory in 2 – 3 payment before the merchandise arrives. Are there any extra steps that need to be taken when there are 2 or more payments prepaid on the same PO? It seems that the PO only wants to accept one payment.

    • Hi Susan,

      When you write a check for the prepayment of inventory, use the Prepaid Inventory account (Other Fixed Asset) under the expense tab. In the memo field write the PO # so you can refer back to this. When you receive inventory and enter a bill, when the PO box pops up, mark the PO you are receiving the inventory for. Enter a -0- for the dollar amount. On the expense tab, enter the amount as a negative, on the item tab enter the item. Here you can enter as many as you want (as long as you don’t go over the total on the PO). You can enter less than what the total is, then enter the amount as a positive. Both the expense and item netted together will equal -0-. If you entered less than the PO total, the next time you receive inventory with bill you will have to option of picking that PO.

      But, if you pre-paid for all the inventory in more than one check, you can still receive the inventory and enter the bill with one transaction. The credit amount you list under the expense tab should total all the pre-payments you made.

  4. Ela says:

    Hi Ellen,

    We prepaid in two diffrent currencies- CAN and US, and I understand that I have to use gain or loss expense account for our books.
    Could you please help me with this?

    Thanks a lot!


    • Hi Ela,

      I don’t have experience with multi-currency in QuickBooks, but I did ask around and was told that if you have the multi-currency turned on it will calculate the exchange rate, and yes you would use a gain or loss expense account.

  5. Christine says:


    I followed your example however this doesn’t move my prepaid inventory to inventory. Any guidance is appreciated.


    • Hi Christine,

      I’m sorry my instructions are not helping you. Without more specific information or actually see what you are doing I can’t answer your question at this time.

  6. kim says:

    Hi Jo Ellen-This was really helpful. Here is my question. I paid for 60,000 of inventory and am receiving it in multiple pieces. I set-up a PO for all goods and follow your first entry to cover the deposit of 12,000. So as the remaining inventory arrives in two separate batches 24,000 and 24,000. I know how to receive the goods against the PO. How does one book the expense for those entries to ensure it’s properly hitting the right accounts? As well, if you make your entry for the deposit in 2013, but the inventory doesn’t arrive until 2014, what’s the best way to make a journal entry at year end to ensure it’s properly accounted for on the books and not double counted in 2104? Thanks!


    • When you create the bill for the inventory items, your inventory account will be debited for the amount. Your expense, or cost of goods sold won’t be affected until you sell the inventory items. You cannot make a journal entry to adjust inventory, a journal entry does not have an option of using items. To adjust inventory use the Adjust Quantity/Value on Hand found under the Activities tab in the Item list.

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