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. Customer deposit accounting means that the funds will be credited.
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.
Example of a Customer Deposit
In accounting, it is essential to observe the double-entry rule. When company XYZ agrees to manufacture a product for a customer, it is common to request a down payment. When the payment is made, the company will debit cash and credit the customer deposit account as a current liability. After completion, the company will then debit customer deposits and credit sales revenue with the same amount.
Situations where Customer Deposits are Applicable
There are about four scenarios where you can use customer deposit:
Poor credit: It happens when a customer has a poor credit record and needs to make prepayments.
High cost: This happens when it becomes expensive to manufacture or produce goods ordered. The company will then request a deposit to facilitate the production process.
Customized: When a customer requests personalized or customized products, the company might request a customer deposit to deliver as per the specification given.
Goods held: It happens when a customer intends to reserve goods, and there are no delivery plans.
The Accounting Process Involving Customer Deposits
In accounting, a customer deposit is simply repayment for the purchase of future goods and services. It is unearned revenue to the company or seller, and it is also an overpayment of customer’s invoices treated as accounts receivables.
When a customer walks into a business entity, it will receive the customer deposit and record it as a liability. After delivery, you need to record on the balance sheet by debiting the liability to eliminate it. As per customer deposit accounting, they will credit the revenue account and treat it as a sale. It may happen in stages, mostly when the delivery occurs over time.
The best advice is to invest in accounting software like Xero; in the end, you will enjoy the accounting process, save time, and generate accurate financial records. After the company accepts customer deposits, they will not incur any sales tax liability. The only way that will be applicable is after goods are delivered, and the deposit becomes a sales transaction.
Some customer deposits can be paid before processing the order, and when this happens, it happens directly into QuickBooks. 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.
Anytime there is a customer deposit account, remember that it will be treated as a current liability. It happens when the goods and services provided are within a year; it becomes a long-term liability when it is a more extended period.
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 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.