Deposits Without Drama: AP Prepayments in D365 Finance

A vendor wants money up front. You want clean books, less rework, and no “where did that deposit go” detective work at month end. D365 Finance gives you two clean patterns.

Pick the right one, set posting correctly, and application becomes boring in the best way.

The Case of the Vanishing Deposit

AP Prepayments in D365 Finance, but make it dad detective story

It is 4:57 pm on a Thursday. Your coffee is cold, the vendor is warm on the phone, and someone wants to know where that 30 percent deposit went. You open F&O, stare at an unapplied balance, and hear the tiny soundtrack of panic. This story has a happy ending. You just need the right cast, the right set, and the right sequence. Lights up.

Cast of characters (The two prepayment patterns, compared)

Prepayment Invoicing, PO-tied

The traceable type. You define a prepayment on the purchase order, create a prepayment invoice from the PO, pay it, and later apply it when the real vendor invoice arrives. The deposit lives in a Prepayment account until you unwind it at application. Best when you want a clean PO-level audit trail.

Prepayment Journal Voucher, not tied to a PO

The quick advance. You post a vendor payment flagged as prepayment using a dedicated posting profile. You later settle it against the vendor invoice. Fast, flexible, less PO traceability.

Dad tip: if you want the deposit to follow the PO like a loyal golden retriever, use PO prepayment invoicing. If you just need to get funds to a vendor and sort it later, use the journal voucher route.

What the docs actually say

Microsoft calls the first option prepayment invoicing and the second option prepayments via journal vouchers. The article explicitly contrasts the two, including where liability sits.

PO-tied prepayment: the end-to-end flow

1. Enter the prepayment on the PO

   1. Action Pane → Purchase → Prepayment. Choose Fixed or Percent, enter value, select Prepayment category ID, save.

2. Confirm the PO

   1. You will not generate a prepayment invoice unless the PO is confirmed. The Learn article’s process sequence and practitioner guidance both reflect that.

3. Create and post the prepayment invoice

   1. From the PO: Invoice tab → Prepayment invoice. Enter vendor invoice number and post. Quantities cannot be changed on a prepayment invoice, although unit price can be adjusted for a partial prepayment.

4. Pay the prepayment invoice

   1. Use a vendor Payment journal and settle the prepayment invoice. This updates the remaining prepayment application value on the PO.

5. Post the final vendor invoice and apply

6. If Prepayment application policy = Automatic, the settled prepayment is auto-applied during manual invoice entry.

7. If Notification, you see a banner and can click Apply prepayment on the pending invoice.

Missed the application at posting time? You can still apply from Vendors → All vendors → Invoice tab → Apply, and you can Reverse the application if you attached it to the wrong invoice.

Vendor Invoice Automation: let the system auto-apply on import

When you import vendor invoices, D365 can automatically apply prepayments by using the PO references on the invoice. It inserts prepayment application lines for you, and those lines are never considered during invoice matching. Behavior in common scenarios:

• One invoice per PO: applies that PO’s prepayment.

• One invoice for multiple POs: applies all relevant POs’ prepayments.

• Multiple invoices per PO: applies to the first imported invoice. If the prepayment is larger than the invoice, auto-apply fails and you apply manually.

• You control whether a failure blocks follow-up automation using the Block follow-up automation process in case of prepayment application failure parameter.

  • To manually apply, clear Include in automated processing, apply, then re-enable.

The alternative: prepayment journal voucher (advance to vendor)

If you do not need PO-level prepayment traceability, post a payment journal line flagged as prepayment using the special posting profile. Taxes can be calculated at prepayment time where required by law, and are reversed when the final invoice posts with actual tax. Later, settle this prepayment to the invoice from the vendor account.

Accounting entries at a glance

• Post prepayment invoice: Dr Prepayment asset, Cr AP.

• Pay prepayment invoice: Dr AP, Cr Bank.

• Post final invoice with application: Dr Expense or Inventory, Cr AP, plus Dr AP, Cr Prepayment to unwind the deposit.

Constraints, gotchas, and how to handle them

• Only one prepayment definition per PO

  • D365 allows a single prepayment definition on a PO. If you need staged deposits, use the payment journal method for the additional advances.

• Quantities on the prepayment invoice are fixed

  • You cannot change quantity on the prepayment invoice. For partials, change the unit price to the partial amount per Microsoft guidance.

• Imported invoices and manual invoices behave differently

  • The Prepayment application policy does not apply to invoices created by data entities. Use invoice automation’s auto-apply, or apply manually.

• Invoice matching and prepayments

  • Prepayment application lines are ignored by matching, so your three-way matching stays clean.

• Reapplying or reversing

  • If you applied the prepayment to the wrong invoice, use Vendors → All vendors → Invoice tab → Reverse to undo, then apply to the correct invoice.

Diagnostics when application “does nothing”

1. PO was not confirmed before prepayment invoice creation. Confirm then invoice.

2. Prepayment not paid and settled. Automation only applies settled prepayments.

3. Prepayment posting not configured on Inventory posting profile, Purchase order tab → Prepayment.

4. Policy mismatch. Accounts payable parameters → Prepayment application policy set to Notification, not Automatic.

5. Imported invoice is blocked due to auto-apply failure. Check automation history, use the Block follow-up automation setting, or temporarily disable Include in automated processing, apply, then re-enable.

Field tips by scenario

• Capital equipment with a 30-30-40 deposit schedule

  • Use one PO prepayment for the first deposit for traceability, then two payment journal prepayments for the later deposits. Apply as each invoice arrives. The product supports one PO prepayment definition.

• Invoice import with OCR or EDI

  • Turn on automatic prepayment application in Vendor Invoice Automation so imports self-apply based on PO references. Confirm behavior for multi-PO and multi-invoice cases, and decide whether failures block other automation.

• Tax on deposit required in your jurisdiction

  • Journal-voucher style prepayments support tax at payment time and reversal at final invoicing. Validate with your tax advisor and local features.

Quick SOP, click-path style

• Set up

  • Inventory management → Setup → Posting → Posting → Purchase order tab → set Prepayment account. Accounts payable parameters → Ledger and sales tax → set Posting profile with prepayment vendor invoice and Prepayment application policy.

• PO prepayment flow

  • PO → Purchase → Prepayment → enter Fixed or Percent, choose Prepayment category ID → Confirm the PO → Invoice tab → Prepayment invoice → Post → Payment journal → Settle and Post → PO Invoice → if prompted, Apply prepayment → Post.

• Automation flow for imports

  • Enable Automatically apply to vendor invoices in Vendor Invoice Automation. If a failure occurs, clear Include in automated processing, apply manually, set it back to Yes.

Dad-level reminder

If your deposit keeps “ghosting” the final invoice, it is usually not commitment issues, it is a policy switch or an unsettled prepayment.

Even relationships and prepayments work better when you actually settle up.

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