If you do business with United Natural Foods (UNFI), you have probably received a check that seems to be paying an invoice, but it has a “PP” notation at the end of your invoice number. You may be wondering what this designation means. It is even more concerning when, later on, you see a check that has that same invoice number with the “PP” at the end, and this time it’s next to a large deduction. You are probably concerned about the size of the deduction; many accountants are stumped when it comes to how this should be booked in your accounting system. Fall Creek Accounting can help. Prepays don’t have to always be confusing, but it is very important they’re accounted for in the right way. 

    UNFI uses this method of prepaying invoices as a way to ensure that they are able to take the cash discount (or early pay discount) on each invoice. While not standard industry practice, they will often pay an invoice prior to receiving the goods for that order. This ensures that they are able to take the two percent discount offered. Most retailers and distributors require that the count and condition of each product is verified prior to a release of funds. If any shortage or damage has occurred in transit, they will deduct for the lost product at the same time they release payment for the order. 

A prepay will show up first as a positive amount on a check you receive. It will always be reflected in the gross value of the invoice (not including any cash discount). Within a few days or a few weeks (depending on the time the order spends in transit), you will receive another check that shows two additional lines relating to that invoice. The first will be the same invoice number with the “PP” designation at the end. This line will show as a deduction for the gross amount of the invoice. You will then see an additional line that just shows the invoice number. This line will be for a positive amount that is less than the gross amount of the invoice. The difference you see between the gross invoice amount and this line will equal two percent—your cash discount. 

    Most of our clients have determined that it is best to apply the initial prepayment to the open invoice in your accounting system. When the second check is deposited, the negative prepayment should not be entered. Instead, it will be washed out by the invoice payment, minus the cash discount. The cash discount should now be booked to the appropriate account. This treatment ensures that your Accounts Receivable aging is accurate (rather than booking the prepay to a holding account and leaving the now paid invoice as open on your books).

     If you need any additional help with reconciling prepays or collecting on past due invoices, please reach out to our team by booking a free consultation.