Down payments refer to the amount of money that the buyer needs to pay the seller before the finalisation of a sale. That amount will usually be a percentage of the total sum of the sale, and it serves a guarantee to the buyer. Typically, you need to make down payments when you purchase high-priced items with a loan to cover part of the purchase price.
Down payments are the payments that the buyers make in advance at the start of a sale (Also see Are Sales and Revenue the Same?). In most cases, this involves the purchase of expensive products or services, which most probably requires continuous instalments afterwards. From the buyer’s perspective, down payments serve to secure the goods or services they want to buy. On the other hand, from the seller’s perspective, down payments help to minimise the risk in a sale.
As we mentioned just now, people often require down payments when they make large purchases. Some examples of items that need down payments include property, plant, equipment, vehicles, as well as other large assets. Usually, the amount of down payment will be a percentage of the selling price of that item.
Some people may think that down payment (Also see How Can You Collect Payments for Overdue Invoices?) is only beneficial for the seller as they can receive the buyer’s payment in advance. However, in fact, this is not true. The buyers can benefit from the down payment as well because this can reduce the amounts they owe to the seller. Hence, the monthly payments will decrease too. At the same time, down payments help to secure their claim to that sale too.
In the world of business, the sellers may request for a down payment if they need to complete a lot of work to fulfil the buyer’s order. For example, they need a lot of workforce for the products or services, or they need to deliver the goods in parts. In this case, it is normal if the sellers ask for a down payment as they need to make sure that the buyers are serious about that purchase.
Most of the time, when the sellers ask for down payments, the buyers will pay for it to secure their purchases. If the buyers have paid for the down payments and have continued for that purchase, that is, they are sure that they will pay the full amount, the seller will usually deduct the down payment from the sum of the selling price. However, some of the buyers may not want to or are unable to finalise the orders. If this happens, the down payment they have made are not refundable. Also, the seller will not return the down payments if the buyers cancel their orders.
As the purchase of large and expensive assets (Also see Accounting for Intangible Asset) is a common situation in the world of business, down payments have become one of the crucial aspects of the process of sale and purchase for some companies (Also see What is a Company Constitution in Malaysia?). Hence, business owners need to ensure that they can keep track of down payments received or paid so that they can stay on top of the financials of their business. If they are too busy to complete accounting tasks like this, hiring an accounting firm in Johor Bahru can be a good choice as they do not need to worry about the accounting-related jobs anymore if they do so.