How to Invoice Advances and Prepayments?

Your customer made a payment for you to start the work. The goods haven't been delivered yet, and the service hasn't been completed.

What happens now? This question is frequently answered incorrectly due to the assumption that "if money comes in, an invoice is issued."

An advance payment alone does not generate an invoice

An invoice depends on the delivery of goods or the performance of a service. An advance payment, however, is a prepayment received for a transaction that has not yet taken place; there is no delivery, and therefore no taxable event.

That is why when an advance payment is received, it is recorded as a collection entry, not an invoice. The money enters the bank or cash register, and in return, you owe a debt to the customer—because you are holding money you haven't earned yet.

In the current account, this means the customer appears as a creditor. It might seem unusual, but this is the correct way, and it resolves once the job is completed.

We discussed invoice issuance timelines and amount thresholds in detail in this article.

When the job is completed: offset

When delivery takes place, the invoice is issued for the entire job. The advance amount is not deducted from the invoice; the invoice is issued with the full amount.

The previously received advance is offset against this invoice, and only the remaining amount appears as a debt in the current account. In other words, the advance does not reduce the invoice; it reduces the receivable.

A common mistake: issuing the invoice over the amount minus the advance. This both understates the VAT base and creates discrepancies with the customer's records.

Adding a note to the invoice such as "X TL advance has been offset" makes reconciliation much easier. You can automate such standard notes with description templates.

Advances, earnest money, deposits

All three look like "money received in advance," but their legal definitions differ.

An advance is a partial prepayment of the price; it is refunded if the work is not done.

Earnest money (binder) ensures the binding nature of the contract. If the buyer backs out, it may be kept; if the seller backs out, a refund with excess may be required.

A deposit is for security purposes and is held to be refunded upon completion of the work.

An amount remaining with you due to a cancellation may no longer be a prepayment and can take the character of income. In this case, your documentation rules change; consult your financial advisor.

To keep track of them

The biggest risk with advances is that they are forgotten. If an advance received months ago is not remembered when delivering the work, you end up asking the customer for money a second time.

The way to prevent this is to record the advance not as a loose collection, but tied to the relevant customer's current account. We explained this setup in the current account tracking article.

It is also important for cash flow planning: the money you have is not yet earned. The pending collections and payments report article covers this distinction.

Frequently asked questions

What should I do if the customer demands an invoice for the advance?

A collection receipt or bank transfer slip fulfills this need. If the document request is for an official approval process, a proforma invoice is appropriate; check out the proforma invoice article.

Is there VAT on an advance?

Since delivery has not taken place, VAT does not arise. VAT is calculated when the invoice is issued.

How do interim payments work in long-term projects?

Progress-based invoices can be issued for the completed part of the work. In this case, the payment is not an advance, but the price of the completed work.

What happens if the advance is refunded?

Since no invoice was issued, a return invoice is not needed; the payment record is processed in reverse and the current balance is closed.

An advance is not bringing the invoice forward; it is collecting the receivable early. Once this distinction is established, both your documentation and current accounts fall into place.

Open a free account on Qolay.App to track your advances and collections on a customer basis.