What is a Customer Deposit in Accounting?

A customer deposit is money from a customer to a company before the company earns it. It is a simple cycle whereby when the company receives cash from a customer and in return, they need to supply goods and services or return the money. If your utility requires such deposits, it is required to pay simple interest on those customer deposits as prescribed by Commission rules. A customer deposit is money paid by a customer to a company before the company has delivered goods or provided services.

• Some businesses receive retainers or deposits from customers before performing any services.
• If you use the Consolidated Payments feature, any deposits made by a customer or its subcustomers can be applied to any of the open invoices in the customer hierarchy.
• You can now see each customer’s retainer or deposit balance, as well as a record of transactions that have affected this balance.
• After the company accepts customer deposits, they will not incur any sales tax liability.
• Find out more from GoCardless to help you with ad hoc payments or recurring payments.
• Suppose a furniture manufacturer, WoodCraft Inc., receives an order from a customer for a custom-made dining table.

For details, see the SOAP Schema Browser’s customer deposit reference page. Now, let’s say it takes WoodCraft Inc. two months to make the table and deliver it to the customer. When the table is delivered, WoodCraft Inc. has fulfilled its obligation to the customer, so it can recognize the $1,000 deposit as revenue. At the same time, it reduces its “Customer Deposits” liability by $1,000. In December 2022 Ace will debit Cash for $50,000 and will credit Customer Deposits, a current liability account.

Creating a Customer Deposit based on a Sales Order

Suppose a furniture manufacturer, WoodCraft Inc., receives an order from a customer for a custom-made dining table. The cost of the table is $2,000, and WoodCraft Inc. requires a 50% deposit before it begins the work. To reduce the number of results to view, you can change the report period to display a narrower date range or select the small https://kelleysbookkeeping.com/comparative-balance-sheet-definition/ triangle next to a customer’s name to collapse their details. You can also use the asynchronous equivalents of SOAP web services list operations. For information about asynchronous operations, see SOAP Web Services Asynchronous Operations. For more information about request processing, see Synchronous Versus Asynchronous Request Processing.

The process starts with creating an invoice and synchronizing it to get the final accurate invoice. It has become a more manageable process using technology; all customer deposit accounting is done from one central point. In accounting, a customer deposit is simply repayment for the purchase of future goods and services.

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It provides the company with cash flow to cover initial production or setup costs and reduces the risk of non-payment after the goods are delivered or the service is completed. A customer deposit is usually classified as a current liability, since the company typically provides services or goods within one year of the deposit being made. If the deposit is for a longer-term project that will not be resolved within one year, it could instead be classified as a long-term liability. The expense reduces your liability account and your chosen bank account without affecting any of your business expense accounts. If you prefer to invoice customers for deposits or retainers instead of receiving them directly, skip to Option 2.

• With the A/R feature enabled, the Customer Deposit general ledger account is generated along with the first Customer Deposit record.
• To reduce the number of results to view, you can change the report period to display a narrower date range or select the small triangle next to a customer’s name to collapse their details.
• Below you will learn how to account for customer deposits, whether you are making or receiving a deposit for an order.
• The retainer item can now be selected when creating an invoice or sales receipt for a deposit or retainer payment.
• First, you need to create a liability account to track the amount of the retainers you receive from your customers.
• When you charge a customer for the services you perform for them, you can turn the retainer or deposit you previously received into credit on an invoice and receive it like a payment.

It is unearned revenue to the company or seller, and it is also an overpayment of customer’s invoices treated as accounts receivables. It follows the accounting principle; the deposit is a current liability that is debited and sales revenue credited. A customer deposit could also be the amount of money deposited in a bank. Since there are no cash earnings, the money is debit to the bank and credit to the customer’s deposit account.

Customer Deposits Workflow Chart

When a customer makes an advance payment for an order or project, you can record the funds received as a customer deposit. These payments are recorded in your general ledger as a liability until the goods or services are actually delivered and do not affect the customer’s accounts receivable balance. From an accounting perspective, when a company receives a customer deposit, it records the amount as a liability on its balance sheet, not as revenue.

• When the order is filled, the deposit is applied against the invoice and the liability is canceled out.
• When in doubt, try to reflect your real-world situation as much as possible.
• At the same time, it reduces its “Customer Deposits” liability by $1,000.

When you are new to the customer deposit business and accounting, it is advisable to outsource experts’ services in the field. Find out more from GoCardless to help you with ad hoc What Is A Customer Deposit? payments or recurring payments. GoCardless will sort your automated payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices.

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If for some reason the company cannot fulfill the order, it would generally be required to return the deposit to the customer, unless other terms have been agreed upon. Similarly, if the customer cancels the order, whether the deposit is refundable or not would typically depend on the terms of the agreement. Let’s assume that Ace Manufacturing Inc. agrees to produce an expensive, custom-made machine for one of its customers. Ace requires that the customer pay $50,000 before Ace begins to design and construct the machine.

Since the bank is not earning this money, the amount is recorded by the bank with a debit to Cash and a credit to Customer Deposits. The retainer item can now be selected when creating an invoice or sales receipt for a deposit or retainer payment. NetSuite tracks the date when each deposit is applied to a customer invoice. If you use the Consolidated Payments feature, any deposits made by a customer or its subcustomers can be applied to any of the open invoices in the customer hierarchy. This practice is common in many industries, particularly in those that involve significant production or delivery times, large or customized orders, or high upfront costs.

Examples of Customer Deposit Liabilities in a sentence

Follow this step if you keep the money from customer retainers and deposits in a separate trust account. First, you need to create a liability account to track the amount of the retainers you receive from your customers. You can now see each customer’s retainer or deposit balance, as well as a record of transactions that have affected this balance. You can track how much of a retainer or deposit you are holding for each customer from the Balance Sheet report. The steps are similar to creating a Sales receipt except that you won’t select a Deposit to account until you receive payment against the invoice. Instead of creating Sales receipts (Option 1), you can invoice customers.