How to Record Factory Production Deposits (Capacity Reservation)
Accounting for upfront cash payments made to overseas factories to secure production lines and purchase raw materials for upcoming collections.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Prepaid Inventory - Factory Deposits | Asset (+) | 50,000.00 | - |
| Cash | Asset (-) | - | 50,000.00 |
💡 Accountant's Note
Apparel factories often require a 30% deposit before they begin 'Cutting' the fabric. This is not an expense; it is a prepayment for inventory. When the goods finally ship and the 'Bill of Lading' is issued, this deposit is reclassified into the 'Inventory In-Transit' account (see Set 3).
Practitioner & Systems Framework
💻 ERP Architecture
These deposits should be tracked in the AP sub-ledger as 'Vendor Prepayments.' It is vital to reconcile these monthly to ensure that deposits are correctly 'applied' against final factory invoices.
⚠️ Audit Flags
Aged Deposits. If a deposit is sitting on the books for >6 months and no goods have arrived, it suggests a factory dispute or a 'lost' deposit that must be written off as a loss.
📄 Required Documentation
Purchase Order (PO), Factory Pro-forma Invoice, and Wire Transfer confirmation.
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