Customer prepayments (deferred income)
What are customer prepayments, and how does a lender read them?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
Customer prepayments are cash a business has received for goods or services it has not yet delivered, shown as deferred income or, under IFRS 15 and the UK's FRS 102 from 2026, as a contract liability. They fund working capital at no interest, so a business paid in advance, such as a subscription firm or a builder taking deposits, can look cash-rich while owing the work. A lender reads them as an obligation to perform: if new orders slow, the inflow stops while the cost of delivering past orders remains, and some lenders will not net cash matched by prepayments against debt.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// THE FULL PAGE
Customer Prepayments: a Worked Example →
Cash in the bank, and a promise to deliver against it.
// WHAT IT IS NOT
Debt-like items include customer deposits that must be refunded, which a desk counts as debt; customer prepayments are the wider balance of cash received for work still owed, read first as a source of working capital and a promise to deliver.
// WORKED IN
// NEXT TO IT
THE ACCOUNTS AND THE AUDIT FILE
- Going concern
- Management accounts
- Related-party transactions
- Capitalised costs
- Contingent liabilities
- Bank confirmation (audit)
- Qualified audit opinion
- Subsequent event
- Debt classification on a covenant breach
- Shareholder current account
- Contract assets (unbilled revenue)
- Right-of-use asset and lease liability (IFRS 16)
- Percentage-of-completion revenue (input and output methods)
- Window dressing (period-end debt)
- Intercompany balances
- Doubtful debts provision (expected credit loss allowance)
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