When deciding whether to use Prepayments or Overpayments in Xero for money paid in advance. It best to check with your accountant first, as the best option can depend on how you're registered for GST — but here's the general idea.

The main difference between the two is when GST is accounted for. With an overpayment, no GST is recorded when the money comes in — it simply sits as a credit on the client's account, and GST is only calculated later when you allocate it to an invoice. With a prepayment, you apply the GST at the time you receive the money, before any invoice is raised.

For advance payments into your account, a prepayment is often the more technically correct treatment if your GST is accounted for on receipt of funds. However, if the amounts are relatively small and not significant, an overpayment can be easier to manage day to day — the credit shows directly in the client's contact balance, so you (and they) can see exactly what's sitting there ready to use.

In short: check with your accountant on your GST basis, but if the deposits are modest, the overpayment option may be the simpler and more visible way to handle them.