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Within this and the following blog posts I will deal with the question how prepayments for vendor purchases can be recorded in Dynamics AX. A special emphasis is thereby made on the tax regulations within the European Union which require that the value added tax (VAT) related the prepayment(s) can be deducted only at the time when the prepayment invoice is paid. For additional information on European tax regulations, please visit this site and/or local government websites.

Note: Within this and the subsequent posts, no difference is made between requested and actually paid (realized) prepayments from an accounting perspective. This issue will be addressed in more detail in the last post on vendor prepayments.  

Let’s get started by having a look of the setup required for recording vendor prepayments in Dynamics AX. The first thing that needs to be setup for recording vendor prepayments is a procurement category. Example:
All transactions recorded for this procurement category are posted on the vendor prepayment account “132200” to incorporate vendor prepayments in the company’s balance sheet. The next screenshot shows you the section of the inventory posting form where the vendor prepayment account needs to be setup.

The next setup step requires the establishment of a prepayment vendor posting profile as exemplified in the next screenshot. Please note that this prepayment posting profile needs to be setup with a special (“temporary”) VAT ledger account – in my example account no. 130850 – that records the VAT of the prepayment invoice once it gets posted. As explained before, the VAT recorded on this account cannot be deducted until the payment of the prepayment invoice is actually made.

After setting up the prepayment vendor posting profile, you have to make sure that the Accounts Payable parameters are linked to this profile.

The last setup required concerns the VAT tax codes, tax groups and item tax groups.

Against the background of the non-deductibility of the VAT at the time when the prepayment invoice is recorded, a separate VAT tax code (“InVAT19A”) is setup that records the non-deductible VAT amount posted. I linked this VAT tax code to the ordinary Accounts Payable sales tax group(s) and the “on accounts” (OA) item sales tax group. (Please note that the on account (OA) item sales tax group is setup together with the procurement category shown before).

In addition, I connected the VAT tax code “InVAT19A” with the non-deductible tax ledger account no. “130850” via the corresponding sales tax ledger posting group.

Finally, I linked the non-deductible VAT tax code “InVAT19A” with the ordinary (deductible) VAT tax code “InVAT19” in the payment sales tax code field. This linkage ensures that we are able to deduct the VAT once the prepayment invoice is paid.

The following screenshots summarize the tax setup made.
EN_61_0020 EN_61_0025

Once all necessary setups are finished, the vendor prepayment process can be performed through the execution of the following four steps.

Step 1: Setup purchase order & record prepayment
The first step required is setting up the purchase order and recording the
prepayment(s) requested by the vendor. Example:
Please note that I recorded the gross amount of the prepayment the vendor asked for [5000 EUR net + 19% VAT (950 EUR) = 5950 EUR]. Also note that the prepayment procurement category needs to be selected in the prepayment form as illustrated in the previous screenshot.

Step 2: Post prepayment vendor invoice
The next step in the prepayment process is posting the prepayment invoice though the corresponding functionality.
When posting the prepayment invoice, the prepayment procurement category and the “on account” (OA) item sales tax group automatically defaults, as illustrated in the next screen-print.
As a result, Dynamics AX generates the following ledger posting:
What you can identify from this voucher is that the tax is recorded on the non-deductible VAT account “130850”.

Step 3: Pay prepayment vendor invoice
After the prepayment invoice is recorded in Dynamics AX it can be paid via an ordinary vendor payment journal.
The only thing you have to look for in this journal is selecting the prepayment check box in the payment tab that automatically changes the posting profile.
After generating the payment and posting the journal, the following transactions result:
What you can identify from the previous screenshot is first, the payment of the prepayment amount from our bank account and second, a transfer of the tax amount from the non-deductible VAT account (130850) to the ordinary (deductible) VAT account (130800).

Note: The screenshot at the lower right-hand corner shows the related vouchers generated in addition to the payment made. As the ledger accounts used in this voucher offset each other, they can be ignored here.

Step 4: Post final vendor invoice
The last step in the prepayment process is posting the final vendor invoice for the delivery of the goods ordered. When doing this posting you have to ensure that the prepayment made is applied and deducted. The next screenshots illustrate how this application can be made.
EN_61_0070 EN_61_0075
Whether or not the prepayment(s) made are correctly applied can be identified in the invoice line section that shows the prepayments that get deducted from the total invoice amount.
After posting the vendor invoice, the following vouchers can be identified:
The first three lines posted represent the ordinary vendor invoice posted for the total amount of the goods (100 pcs. * 230 EUR/pcs. = 23000 EUR + 19% VAT = 27370 EUR). Please note that the total VAT amount (4370 EUR) is posted on the ordinary VAT account 130800.

The last three lines highlighted in yellow color represent the deduction of the prepayment made. What is interesting (wrong) here is that Dynamics AX uses the non-deductible VAT account (130850) to record the VAT already paid in step 3. In order to highlight the problem with the last voucher, I summarized all transactions created during the prepayment process in the next image.
What you can identify from this summary is that the last voucher should credit the ordinary VAT account (130800). Yet, it actually uses the same – (wrong, while non-deductible) – VAT account (130850) that was used when posting the prepayment invoice.
As a result, 5320 EUR (950 EUR + 4370 EUR) – highlighted in red color – are posted on the ordinary deductible VAT account no. 130800 that results in a wrong, while too high VAT deduction.
At the same time, the non-deductible VAT account no. 130850 still shows a credit balance of 950 EUR.


Alternative Setup Option A:
As the previously illustrated standard setup of the prepayment functionality for purchase orders provided a problematic, while wrong outcome, I changed the setup of the procurement category by assigning the ordinary (“full”) item sales tax group as illustrated in the next screen-print.
In addition to this change, I also modified the sales tax prepayment account linked to the prepayment vendor posting profile by using the ordinary (deductible) VAT account 130800.
After repeating all prepayment process steps, the following vouchers remained.
What can be identified from this summary is that the total VAT amount posted and deducted is correct. Yet, the first “ordinary” VAT transaction is already recorded with the posting of the prepayment invoice. From a tax perspective this is too early and can lead to problems with tax authorities especially in cases where prepayment invoices are posted earlier than the final purchase vendor invoice for example due to long transportation times.


Alternative Setup Option B:
As the previously illustrated alternative setup option leads to a potential tax evasion, I changed the setup of the procurement category once again and linked it with an item sales tax group (“without”) that does not record any VAT.
Result: As before, after repeating all prepayment process steps, the following vouchers remained.
The posting summary illustrated in the previous screenshot shows that the VAT is posted and deducted at the time the final vendor invoice for the purchase order is recorded. This approach can be considered as very conservative and won’t result in problems with tax authorities. Yet, from a financial cash flow perspective this approach can be problematic and easily result in cash flow problems, especially if large amounts are involved.


All approaches for recording vendor prepayment illustrated in this post are more or less problematic (wrong). As a result, if your company operates in a VAT environment, I would recommend not using the prepayment functionality available in the purchase order form for recording prepayments. Within the next posts I will show you some alternative approaches that result in correct tax and ledger transactions. Till then.