What is a Customer Deposit in Accounting? (2024)

FAQs

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.

A customer deposit is a prepayment for the purchase of future goods and services (unearned revenue). Overpayment of customer invoices (A/R) may also be considered customer deposits because they are also considered unearned revenues.

Accounting for a Customer Deposit

The company receiving a customer deposit initially records the deposit as a liability. Once the company performs under its contract with the customer, it debits the liability account to eliminate the liability, and credits a revenue account to record the sale.

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.

Deposits (whether refundable or non-refundable) and early or pre-payments should not be recognized as revenue until the revenue-producing event has occurred. The cash given to the unit is a liability because it represents an obligation the unit has to provide the good or service (and justify receiving the cash).

Debt-like items operate like debt but are typically non-interest bearing and can relate to operational and non-operational liabilities. Common liabilities to consider and evaluate as debt-like items include the following: Deferred revenue and customer deposits.

Although banks do many things, their primary role is to take in funds—called deposits—from those with money, pool them, and lend them to those who need funds. Banks are intermediaries between depositors (who lend money to the bank) and borrowers (to whom the bank lends 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. Since there are no cash earnings, the money is debit to the bank and credit to the customer's deposit account.

Deposit is a term used to denote the money kept or held in any bank account, especially to accumulate interest. Deposit also refers to a sum of money used as a security for the delivery of products or making use of services.

How do you treat customer deposits? ›

On a balance sheet, a deposit is treated as a liability. The cash counts as an asset, but the liability is future work that the company owes the customer. Put bluntly, the buyer is on the hook for delivering goods or services to the customer who made the deposit.

A deposit is not a loan. Typical deposits include returnable containers, security deposits, rental deposits, and agreements for sales of goods or services. In general, deposits received by a taxpayer must be included in the taxpayer's gross income if received by the taxpayer “on his own behalf for his own benefit”.

The debit account will be the bank account that is being deposited into, and the credit account will depend on the source of the deposit. Include a brief description of the deposit in the journal entry. This could include the customer name, the invoice number, or a description of the source of the deposit.

In your accounting journal, debit the Cash account and credit the Customer Deposits account in the same amount. Send an invoice to the customer for the work after it has been completed. Note on the invoice the amount of the deposit previously paid and subtract it from the total amount owed.

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.

Example of a Customer Deposit

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.

A deposit is 'non-refundable' if it's reasonable at the time of the contract was signed. In California law this concept is called 'liquidated damages'. Parties to a written contract can agree in writing what is going to be the 'penalty' for a party to break the agreement.

A deposit is a sum that is paid to you by a client before you begin your services. Deposits typically indicate the formation of a contract and provide assurance to both you and your client that the job will be complete based on the agreed upon terms.

This means when a banker receives deposit from a customer, if the deposit is to the credit of the customer, the banker becomes a debtor and the customer creditor. Thus, in all savings account where the customer's account is in credit balance, the banker is the debtor and the customer, creditor.