What Is Prepayment Risk?

The advance payment is the buyer paying a certain amount of advance payment to the seller after the transaction contract is signed. This method is not conducive to the buyer, and is generally used when the supply of traded goods is in short supply. The buyer has to bear commercial risks and backlog of funds, in fact, provides credit to the seller; the seller receives the payment before delivery, which is conducive to capital turnover and has no commercial risks. There are two cases of prepayment: one is as a guarantee for the importer to execute the contract, usually called a deposit, and the prepayment period is short, which does not account for a large proportion of the transaction amount; the other is the importer provides credit to the exporter and the prepayment period Longer and larger amounts. ^[1]

[yù fù kun]

yùfùkun

[advance payment] Currency that is paid in advance for permitted services or products.

1. There are no restrictions on the amount of advance payments;

2. The advance payment is a part of the contract payment. The parties' agreement on the advance payment is promised and does not take actual delivery as an effective element;

3. The advance payment is the prepayment of part of the price, and it is still liquid in nature;

4. The advance payment has no two-way or one-way guarantee effect, and the parties fail to perform the contract.

Prepayment is a means of payment whose purpose is to:

(1) To solve the shortage of working capital of one party to the contract.

(2) Sincerity to perform as a contract.

Problem Description:
Our company has recently won a bid for a project. First, we signed a contract with a partner company and received an advance payment according to the contract. Some related costs will occur during the implementation of the project. How should the entire process be booked?
Reference solution:
According to the description of the problem, the entire process can be booked from the following 7 aspects.
1. When costs occur:
Borrow: Engineering construction-contract cost loan: payable to employees' salaries / raw materials / bank deposits etc. 2. When settling payments:
Borrowing: Accounts receivable Loan: Engineering settlement 3. When receiving payment:
Borrow: bank deposit loan: accounts receivable 4. Recognized cost of revenue:
Borrow: Main business cost Engineering construction-Project gross profit loan: Main business income 5. Accrual of market price loss:
Borrow: Asset price loss loan: Inventory price reserve 6. Carryover price loss after project completion Borrow: Deposit and loan price preparation loan: Main business cost Gross profit ^[2]