Cash is King: Streamlining the Down Payment Process in Construction

At TRUE, we serve a variety of trades and have found that many of our users are looking for two key things:

1. Increasing cash flow by soliciting down payments on an invoice before starting construction work, and
2. Adhering to a revenue recognition principle for their company’s financial statements.

It’s at this junction where TRUE can shine; offering a unique process to keep money coming in while also providing a straightforward invoice experience for both the user and their customer.

The TRUE Down Payment Process: How It Works

Let’s look at the number of records produced in TRUE for a typical 50% down payment process:

1. Down payment invoice
2. Receipt for the down payment
3. Client credit to remove revenue and increase customer deposits/unearned revenue
4. Application of client credit to remove customer deposits/unearned revenue
5. Final invoice to recognize revenue
6. Final payment

What Do the Down Payment Journal Entries Look Like for the Financial Statements? 

To understand the down payment process in detail, let’s walk through each step and its corresponding journal entries.

Step 1: The Down Payment Invoice

The Down Payment Invoice is how we record the receipt of the initial deposit. Here’s how the journal entries look:

• Debit – Accounts Receivable (Deposit amount)
  • Credit – Revenue (Deposit amount)

Step 2: Receipt of the Down Payment

Once the money is received, a credit amount is left open to be applied to a final invoice. The journal entries are:

• Debit – Cash
  • Credit – Accounts Receivable
• Debit – Revenue
  • Credit – Customer Deposits

Step 3: Final Invoice Creation

When the final invoice is created, the customer deposits are reversed, and revenue is realized. The journal entries are:

• Debit – Accounts Receivable 
  • Credit – Revenue (Total of Sale)
• Debit – Customer Deposits (Deposit amount)
  • Credit – Accounts Receivable (Deposit amount)

Step 4: Final Payment Receipt

Upon receiving the final payment, the journal entries are:

• Debit – Cash
  • Credit – Accounts Receivable

Why TRUE’s Down Payment Process Stands Out

One of the standout features of TRUE is our ability to display the previously made down payment (receipt) on the final invoice. So, the customer clearly understands what was previously paid and the total amount due. Furthermore, this process cuts down on correspondence between the user and their customer as there isn’t an actual ‘50% Invoice’ created, since we create a Down Payment Invoice with a ‘Down Payment’ line item.

Key Benefits of TRUE’s Down Payment Process:

• Improved Cash Flow: With money upfront, businesses can better manage their working capital.
• Clear Communication: Customers are always aware of what they have paid and what’s still outstanding, which reduces confusion and the need for follow-up correspondence.
• Accurate Financial Reporting: TRUE’s financial statement movement/recognition model for internal purposes ensures that businesses stay compliant with accounting principles, helping them avoid potential financial misstatements.

If you’d like to learn more about how TRUE’s Construction Accounting Suite can improve your financial management, email us at support@constructtrue.com today!