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Last edited 22 Feb 2021
Down payment chain
A down payment, which is sometimes referred to as an advance payment, or ex gratis payment, is when part of a contractual sum is paid in advance of the exchange, i.e. before any work has been done or goods supplied. Down payments are typically recorded as prepaid expenses by the payer and recorded as assets on the balance sheet.
A down payment is made in advance of the normal payment procedure. This may be to ensure certain works are started, or to recover or prevent a delay or to expedite certain materials. It might be accompanied by an advance payment bond.
On a construction project, a contractor may, for example, request an advance payment to help them meet significant start up or procurement costs that may have to be incurred before construction begins. For more information see: Advance payment.
A down payment chain documents multiple transactions to help organisations monitor costs through a series of partial invoices. When the job is completed, a final invoice is prepared to reflect adjustments that have been made during the process.
In terms of accounting, down payment chains are designed to:
- Make data entry more efficient.
- Improve data processing.
- Clarify budgetary benchmarks.
- Control activities around long-term accounting tasks.
There are two types of down payment chains: debit side or credit side.
Debit and credit side down payment chains are both constructed in the same manner. The only difference between the two is the incoming or outgoing payment data, which dictates whether the chain is debit or credit side.
The debit side down payment chain is suitable for transactions with customers. This can include invoice processing and transaction payments. It is designed to track receivables owed to customers along with corresponding incoming payments. It can also be used to gain insight into past and future payments.
The credit side down payment chain is suitable for transactions with vendors and subcontractors. This also includes invoice processing and transaction payments. It is designed to track payables owed to vendors and subcontractors (or other providers) along with corresponding outgoing payments. As with debit side down payments, it can also be used to gain insight into past and future payments.
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