Accounting of Prepayment Transactions

When Prepayment is made to Supplier, ‘Prepayment A/c’ is debited and ‘Bank A/c’ is credited.

Accounting Entries:

Prepayment A/c Dr 1000 ------
Bank A/c Cr ----- 1000

In other ERP system, this is handled in 2 steps as below:

(a) Prepayment Invoice is entered in the system first; the following accounting entries are created by system.

Prepayment A/c Dr 1000 ----
Liability A/c Cr ---- 1000
(Only difference is that Prepayment Invoice debits the Prepayment A/c and Standard Invoice debits the Expense A/c)

(b) Cheque Payment of 1000, referring the above Prepayment Invoice, is made; following accounting entries are created by system.

Liability A/c Dr 1000 ----
Bank A/c Cr ---- 1000

As we know, Prepayment is an Asset. Till the time we receive Items and the Invoice from Supplier, the Prepayment remains as an Asset.
When Items and Invoice are received from Supplier and entered in our system, we do matching of this (standard) Invoice with Prepayment Invoice.

But in ERPNext, I understand that the Prepayment to Supplier is accounted as Liability. I am unaware why the accounting treatment of Prepayment A/c in ERPNext is not in line with the accounting standard. Those who are experienced in ERPNext, kindly help me to understand or correct me if my understanding is wrong.

Also, I understand that ERPNext has NO function to record Prepayment Invoice (means, I am unable to record the Liability in my system before I pay ‘Advance to my Supplier’). Is this standard in ERPNext?

If yes, how to handle the Prepayment activity in ERPNext?

My requirement is simple that I want to record Liability first (thru Prepayment Invoice), following by ‘clearing that Liability’ with Payment.

Looking forward for experts’ advice!

This is 100% EXACTLY my problem too. I bought a goods from overseas with transfer in advance method. But ERPNext won’t allow me to consider this goods as an ASSET. ERPNext is forcing me to treat this PAID GOODS as a liabilities.

UPDATE: I found a possible workaround for this. When you create purchase invoice check the “update stock” option and choose the desired “transit” warehouse. If you do that ERPNext will not treat the purchased goods as liabilities, so you can change the expense head from liabilities account to asset account. After you submit the purchase invoice, it will appear in the “transit” warehouse account in the COA.