There are often times when you need to pay to your suppliers in advance. The reasons for why you’d need to do this may be what they are, but what matters to you, is recognizing those prepayments properly on your financial statements and treating them properly in your accounting.
So once you’ve determined that you are going to make the prepayment (note here that in some cases you may be more inclined towards not paying before getting something and you may be interested in negotiating; it’s more of a matter of managing your cash flows), you ought to take this up as an asset on your statements – you’ve paid your resources to a third party and as such what you merely did, was give your resources to be held by someone else and hopefully, if all goes according to plan, to be used for delivering your goods or services at some given time. It is still your company’s asset. The accounting entry you’re doing in such a case is as follows (presuming you paid 2,000 to your supplier):
Db Prepayment to supplier2,000
Cr Cash and cash equivalents2,000
Now, as the situation requires, at some point you’ll be getting something for this prepayment and you’ll probably be asked to pay some more for the prepayments usually are just partial payments. The accounting entry you’d then do is as follows (presuming here that you paid 50% up front):
Db Inventory / Expense account4,000
CrPrepayment to supplier2,000
Cr Payable to supplier2,000
For half you’ve already paid and as you’ll be obtaining your goods or services, it’s debited either into expenses or inventory, depending on the type of what you bought. Note here that only the remaining 50% is accounted as a payable to the supplier since you’ve already paid up the other 50%.