Our company made a down payment on inventory. The manufacturer will ship the order within 30 to 60 days after our original payment. The remaining balance is due 60 days after the order has shipped. How do we account for this transaction on our books?

ANSWER

The BIDaWIZ Team's Answer:

You would create an other current asset account and label it as prepaid inventory. This account would be debited and cash would be credited to reflect the down payment. When you actually receive the inventory, you would credit the prepaid inventory account and debit inventory. When you receive the remaining inventory, that account would be debited and the accounts payable account would be credited. When you pay the remaining amount, the account payable account would be debited and the cash account would be credited.