Accounting Method: Cash or Accrual, Which Should You Choose?
Cash accounting records income when paid; accrual records it when earned. Compare both methods, IRS rules, and which to pick on Schedule C.
What Is a Down Payment in a Journal Entry?
A down payment in a journal entry records cash paid upfront for goods, services, or an asset. See how to record it correctly with examples
ExpensePoint team
Updated: Jun 2, 2026
|
Published: May 12, 2026
Definition of a Down Payment
What is a down payment in accounting?
A down payment is cash paid upfront toward a larger purchase, before the buyer has fully received the goods, services, or asset. In a journal entry it is recorded as an asset, not an expense, because it represents value the buyer is still entitled to receive — or has just acquired through financing.
The accounts used depend on the situation. A deposit paid before delivery is debited to a prepaid or deposit account. A down payment made when the asset is delivered immediately is debited directly to the asset, with any financed balance credited to a liability.
How to Record a Down Payment (Journal Entry Examples)
Example 1: Down payment before delivery
A company pays $5,000 upfront to a supplier for inventory scheduled to arrive in 30 days. At the time of payment:
| Account | Debit | Credit |
|---|---|---|
| Prepaid Inventory | $5,000 | |
| Cash | $5,000 |
When the inventory is received, the prepaid balance moves into inventory:
| Account | Debit | Credit |
|---|---|---|
| Inventory | $5,000 | |
| Prepaid Inventory | $5,000 |
Example 2: Down payment on a financed asset
A company buys equipment for $40,000, paying $10,000 down and financing the remaining $30,000 through a bank loan. On the purchase date:
| Account | Debit | Credit |
|---|---|---|
| Equipment | $40,000 | |
| Cash | $10,000 | |
| Notes Payable | $30,000 |
The equipment is recorded at its full cost, cash decreases by the amount paid, and the unpaid balance becomes a liability that is reduced as loan payments are made.
Example 3: Vehicle purchase with a down payment
A company buys a delivery vehicle for $35,000, paying $7,000 down and financing the remaining $28,000 through an auto loan. The vehicle is recorded at full cost on the purchase date:
| Account | Debit | Credit |
|---|---|---|
| Vehicles | $35,000 | |
| Cash | $7,000 | |
| Notes Payable | $28,000 |
The full $35,000 cost is capitalized as an asset, cash falls by the $7,000 paid, and the $28,000 balance posts to a liability that shrinks as loan payments are made.
How to Record a Down Payment Received From a Customer
When a customer pays a down payment before you deliver the goods or service, the cash is yours to hold but not yet earned, so it is recorded as a liability — not revenue. Debit Cash for the amount received and credit a Customer Deposits (or Unearned Revenue) liability account.
| Account | Debit | Credit |
|---|---|---|
| Cash | $3,000 | |
| Customer Deposits (liability) | $3,000 |
Once the work is delivered, you reverse the liability into income — debit Customer Deposits and credit Revenue. So on the cash side a down payment received is a debit; the offsetting credit is the deposit liability until the sale is earned.
Is a Down Payment a Debit or a Credit?
Both. The cash leaving the business is a credit to Cash. The offsetting debit goes to the prepaid account (if delivery is pending) or the purchased asset (if delivery is immediate). On financed purchases, an additional credit posts to a liability account for the unpaid balance. A down payment is not an expense until the related goods or services are received, or until the deposit becomes unrecoverable.
How to Record a Down Payment in QuickBooks Online
To record a down payment to a vendor in QuickBooks Online, hold the upfront cash as a prepaid asset, then apply it when the final bill arrives:
- Create a current-asset account named Vendor Prepayments (or use Prepaid Expenses) under Chart of Accounts.
- Record the down payment with + New → Expense or Check to the vendor, setting the Category to that prepayment account so the cash is held as an asset rather than expensed.
- When the final invoice arrives, enter the full Bill.
- Apply the prepayment by creating a Vendor Credit coded to the prepayment account, then link it when paying the remaining balance.
This keeps the upfront cash on the balance sheet as a prepaid asset until the goods or services are received, matching the journal-entry treatment above.
Recording a down payment in your accounting system
However you book a down payment, the entry is only as accurate as the data behind it. ExpensePoint captures the receipt at the point of purchase, codes it to the correct prepaid or asset account, and syncs it to QuickBooks Online, Sage Intacct, NetSuite, Xero, Microsoft Dynamics 365, or SAP Business One—so the entry reaches your ledger without manual re-keying. See ExpensePoint's accounting integrations.
Related reading: Accounting Method: Cash or Accrual, Which Should You Choose?
Keep your down payment entries clean from receipt to ledger
ExpensePoint captures upfront payments, codes them to the right account, and exports audit-ready entries straight into your ERP.
FAQs
Is a down payment an asset or an expense?
It's an asset. A down payment is cash you've paid for value you haven't fully received yet, so it sits in a prepaid or deposit account — or directly in the purchased asset — never as an expense at the time of payment.
Is a down payment a debit or a credit?
Both. The cash leaving the business is a credit to Cash; the offsetting debit goes to a prepaid account or the asset. On financed purchases, an extra credit posts to a liability for the unpaid balance.
How do you record a journal entry for a vehicle purchase with a down payment?
Debit the Vehicles asset account for the full purchase price, credit Cash for the down payment, and credit Notes Payable for the financed balance. The vehicle is capitalized at full cost on the purchase date.
How do I record a down payment in QuickBooks Online?
Record the payment to a prepaid-asset account using an Expense or Check, then enter the full bill when it arrives and apply the prepayment with a vendor credit. This holds the cash as an asset until the goods or services are received.
How do you record a down payment received from a customer?
Debit Cash and credit a Customer Deposits or Unearned Revenue liability. It becomes revenue only when you deliver the goods or service.
What happens if a down payment or deposit is forfeited?
If the deposit becomes non-refundable and you receive nothing in return, it converts from a prepaid asset to an expense. For a seller, a forfeited deposit liability is recognized as income.