Summary of How to Account for Customer Deposits
- What type of account is customer deposits?
- What are the 4 types of deposit accounts?
- What is a consumer deposit account?
- What is a client deposit account?
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AI Overview
AI Overview
Customer deposits are treated as a current liability on the balance sheet because they represent payments received for goods or services not yet delivered
. Record the receipt by debiting Cash (Asset) and crediting a Customer Deposits account (Liability). When the service is provided, debit Customer Deposits and credit Revenue.
Accounting Steps for Customer Deposits
Receipt: When receiving money, debit the bank account (Asset) and credit a liability account (e.g., Customer Deposits or Unearned Revenue).
Recognition: Once the goods or services are delivered, reverse the liability by debiting the Customer Deposits account and crediting the Sales Revenue account.
Refunds: If the deposit must be returned, debit the Customer Deposits liability account and credit the Cash account.
Key Considerations
Classification: It is a current liability because it is generally settled within 12 months or less.
Purpose: It acts as a safety measure, as the company does not technically own the money until the service is rendered.
Tracking: It is essential to track these deposits by customer to maintain accurate, detailed records, often managed through QuickBooks.
Non-refundable vs. Refundable: In accrual accounting, even non-refundable deposits are generally treated as a liability until the service is performed.
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What is a Customer Deposit
When a customer provides cash in advance as a condition of the sale. Typically before the product or service is delivered, but some time before it is produced or available.
Accounting for customer deposits is pretty straightforward.
The customer deposit is recorded as a credit or liability on the balance sheet, often in a customer deposit or customer prepayment account. It is typically a current liability as it will be settled within 12 months or less. The offsetting entry is to debit cash.
It is important to look at ASC 606 Revenue to make sure the deposit isn’t considered part of revenue. You will have to look at the contract and the associated performance obligations. In most situations, almost by definition, the deposit is a cash payment in advance of any performance obligations.
Why Require A Customer Deposit?
What are some reasons a customer would need to make a deposit?
- In order to reserve a product or service that is in demand, scarce, of limited quantity, or hard to find.
- As a way of showing commitment. The deposit may or may not be refundable, either in part or in full.
- Because the customer has poor credit.
- In order to provide working capital to the supplier so they can make or develop the product or service.