Definition: Prepayment of goods and services

Category: External debt - IMF

When an importer makes a prepayment to an exporter for goods and services, the exporter has aliability to the importer that remains outstanding until ownership of the goods changes hands or the service is provided. Similarly, when an importer makes a postpayment some time after he acquires goods or services, the importer has a liability to the exporter that remains outstanding until the postpayment is made. These liabilities should be recorded as debt liabilities because future payments are required; in the case of the prepayment, the principal amount outstanding is repaid in goods or in a service provided, whereas in the case of the postpayment, it is likely that a financial payment will be made, although in the instance of barter, goods or services may be provided to extinguish the debt. Unless the prepayment is for more than one year hence, these debt liabilities should be recorded as short term, trade credit. Also, unless the agreed date for payment is past, neither the prepayment nor postpayment of goods and services should be recorded as arrears. http://ec.europa.eu/eurostat/ramon/statmanuals/files/external_debt_guide_2003_EN.pdf#page=227