Customer Prepayments

Customer prepayments occur when a customer pays for a product or service before it is actually delivered or completed. This practice helps businesses manage cash flow and confirms the customer’s commitment. For example, paying upfront for a custom order or booking a service in advance. Prepayments are recorded as a liability on the company's balance sheet until the product or service is provided, at which point the amount is recognized as revenue. This ensures the financial records accurately reflect the pending obligation and the cash received.