Customer Deposit

What is a customer deposit?

A customer deposit is an advance payment received before delivering goods or services. The deposit creates an obligation to perform or refund. Until you deliver, the deposit is a liability on your balance sheet, not revenue. Proper accounting for deposits prevents overstating income and understating obligations. Service businesses often collect deposits to secure commitment and fund project startup costs.

Recording deposits correctly

Credit a liability account like customer deposits or unearned revenue when you receive the payment. When you deliver and invoice the customer, apply the deposit by debiting the liability and crediting the invoice. The net effect is recognizing revenue when earned, not when cash arrived. Many accounting systems have specific workflows for handling deposits and applications.

Refundable vs non-refundable deposits

Your engagement terms should specify whether deposits are refundable. Non-refundable deposits may be recognized as revenue when received if cancellation is unlikely and you have no further obligations. Refundable deposits remain liabilities until applied to services. State laws may restrict non-refundable terms in certain industries. Clear contracts prevent disputes.