UPDATED DECEMBER 2022 for Odoo 16

Odoo has a Prepayments account to manage this as well as a Prepayments section on the Balance Sheet.

First, create a Vendor Bill using either a prepayment service setup to book to the Prepayment account, or just book directly to the account:

At this point your Balance Sheet looks like this:

Register a Payment (a regular Vendor Payment) against this Bill, at this point your Balance Sheet looks like this:

Since you have a regular Vendor Payment, you can reconcile it with the Bank Statement.

The Accounts Payable account was used, temporarily, to post the balance existing between the time of validating the Bill and registering the Payment:

At the time you want to use the Prepayment, use the Automatic Entries Wizard to create a Manual Journal entry to move it back to AP to use:

1. Filter the Journal Items to find all prepayment debits, tick the one you want to convert, and select Automatic Entries from the Action Menu:

2. Complete the Wizard, choosing the AP account and the Journal:

This will automatically create this Journal Entry, and you can edit the Reference if you wish to make it easier to understand for those applying payments.

At this point, you will see it below the Bill (in this example our prepayment was just over 40% of the Bill sent with whatever we prepaid for) and can apply it to reduce the balance: