Last editedOct 20222 min read
When you receive cash from a customer before providing goods or services, how is this accounted for? Are customer deposits assets or liabilities in accounting? Here’s a closer look at how to account for deposits from customers, including the correct category to record them under.
What is a customer deposit?
Traditionally, a customer pays for goods or services at the time they’re received. When a customer pays for these goods or services before they’re received, this is called a customer deposit. It might be a partial down payment or payment in full for the item. Once a deposit’s received, the company then is obligated to provide the goods or services as promised.
For example, imagine that a bride-to-be orders a bespoke wedding dress from a boutique. She pays a $1000 deposit in advance to ensure the dress is held for her while alterations are made. This prepayment is held by the company, with any remaining fee paid at the time that the dress is completed and handed over. If the company is unable to provide the promised goods or services, the deposit must be refunded.
When should you ask for customer deposits?
There are a few circumstances why your business might need to ask for a deposit.
The customer has a poor credit rating, making it safer to ask for money in advance.
The finished product is luxurious or expensive, requiring advance payment for materials to complete its production.
The finished product or service is custom-made specifically for the client and would be unlikely to be sold to another customer.
The customer wants to guarantee delivery of the goods or services on a predetermined date.
What is the difference between assets and liabilities?
Now that we’ve covered the definition and uses of customer deposits, let’s turn to basic accounting principles. Assets and liabilities are listed on the company’s balance sheet. Assets describe everything your company owns, while liabilities show everything owed. According to double-entry bookkeeping, all transactions must include two entries. Credits show where money comes from, while debits show where the money goes. This should be kept in balance to comply with accounting principles.
Are customer deposits current liabilities?
So, are customer deposits current liabilities or assets? Under the rules of double-entry accounting, they would qualify as a current liability. Although you’ve received money, it’s not really yours until you’ve provided the finished product or service. If you can’t provide the service, the money must be refunded, which is why it cannot be recorded as an asset until the transaction is complete. It’s a “current” liability for up to one year, after which point it becomes a long-term liability.
How to account for deposits from customers
What does this look like in accounting? Let’s take the example of the wedding boutique. The bride-to-be has put down a $1000 deposit, which is recorded as a liability on the customer deposit account. Once the wedding dress is finished and delivered to the customer, the liability account is debited by $1000. The sales revenue account is then credited with $1000 to record this transaction. This ensures that the accounts are balanced according to the double-entry rule.
This process might happen with a single transaction, or it could involve numerous stages for ongoing delivery of a service. When this happens, accounting can become increasingly complicated. It’s a good idea to invest in accounting software like Xero or Salesforce to make sure your assets and liabilities are recorded in the correct accounts. GoCardless partners with these and other accounting platforms to streamline your payments process. You can create invoices, accept deposit payments, and monitor your accounts all with a joined-up workflow. This helps prevent any confusion when it comes to customer deposits in accounting.
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GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.