Deposits and Guarantees

Where Deposit Transaction includes Cash Involvement, But

Guarantee Transaction Does not Involve Cash and Guarantee is

 just an Oral Agreement

When u raise an deposit u pay it.  Again when 

invoice is raised u tie the invoice to the deposit.

It is promise to buy a specified quantity. u 

dont pay the Guarantee. U only tie the invoices to  a 

Guarantee. For both the revenue account is unearned.

Prepayments in business are not unusual. In Payables, we prepay employees for their expenses ahead of their trip; we prepay suppliers in advance for the goods to be delivered in future. The same can happen with your customers as well. You customers would like to prepay (commitments) in advance for the goods to be delivered in future. These commitments can be against 

·Pricing agreements that they have contractually agreed for a specific product 

·Only for a specific product without any pricing agreement 

·Or just a commitment in general which can be used against any purchase without any agreement

This article focuses on how these commitments and pricing agreements are used in sales orders and AR transactions. Also it discusses what happens to the customer balances and accounting when this sales order line is invoiced.

We all know the order to cash process. We 

·Enter an Order

·Ship that order

·Invoice that order

·Collect and apply cash against that invoice

But just reverse the cycle where you will see

·Receive cash from customer in advance

·Create deposit transaction and apply that cash receipt against the deposit

·Enter and ship an order. While doing so you specify which deposit transaction (commitment) you are shipping goods against.

·Invoice the order

·Invoice balance gets adjusted and applying the prior commitment (invoice adjustment).

Commitments in are created in AR in the form of transactions. Commitments can be of two types: Deposits and Guarantees. User guide defines these two transactions as follows:

Deposits: Customer’s prepayment for goods or services that you will provide in the future.

Guarantees: Contractual agreement with your customer to conduct business over a specified period of time.

Technically there is no difference, but business process wise these two transaction types help identify the transaction in a different perspective. While creating these commitments, you can refer to a pricing agreement created for this customer in OM. This will help qualify when you are referring to commitment in order line.

If a customer pays $10,000 in advance, you get a check without any invoice reference. It can come through the lock box as well. Based on this you create a deposit and apply this check to it making the balance in deposit to zero. Now you have commitment.

How the process is done in APPS:

Next step is to enter a sales order. While entering the sales order line, you can choose the commitment you just created in AR in the LOV in the commitment field (available in order lines).You ship the goods and invoice the customer for the same. When you run auto-invoice import for the same you will see that Prepayment Matching program automatically kicks off. What this program does is to apply an adjustment to this invoice to the extent of the deposited amount. By doing so this invoice balance is reduced. So now you have 

·Deposit

·Cash receipt

·Invoice for sales order 

·Adjustment to reduce the balance on this invoice

Each one of them has accounting as follows. You can follow serial number logic to identify which account is getting cleared in which transaction

When Cash is received :

Sr. No.	Account	Cr.	Dr.
1	On Account	10,000
2	Cash		10,000

When Deposit created:

Sr. No.	Account	Cr.	Dr.
3	Unearned Revenue	10,000
4	Receivables		10,000

When cash receipt is applied against this deposit:

Sr. No.	Account	Cr.	Dr.
1	On-Account		10,000
2	Cash	10,000
2	Cash		10,000
4	Receivables	10000

When order line is invoiced:

Sr. No.	Account	Cr.	Dr.
5	Revenue	10,000
6	Receivables		10,000

At the time invoicing since customer has already paid for these goods, an adjustment is created making this invoice balance to zero

Sr. No.	Account	Cr.	Dr.
6	Receivables of invoice	10,000
3	Unearned Revenue of Deposit		10,000

The net entry at the end of all these transactions is:

Sr. No.	Account	Cr.	Dr.
5	Revenue	10,000
2	Cash		10,000