How to Account for Customer Deposits
Create an account called "Customer Deposits" or "Prepaid Sales" in your accounting journal., Determine which accounts to debit or credit., Record the amount of the deposit that the customer makes., Send an invoice to the customer for the work after...
Step-by-Step Guide
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Step 1: Create an account called "Customer Deposits" or "Prepaid Sales" in your accounting journal.
While a customer deposit sounds like straight income to you, it is in fact a liability to the business because you "owe" the customer something.
This is why you need to create a special account.Think of an account as like a line item on your personal budget.
Check to make sure that this "Customer Deposits" account has not already been created under another name. -
Step 2: Determine which accounts to debit or credit.
All financial transactions must be entered in the company's general financial ledger.
Each transaction is listed as a debit or credit and for every debit there must be a credit.
Debits increase expenses, assets (such as cash or furniture) and dividend accounts.
Credits decrease these accounts.
An easy way to remember this is D-E-A-D (Debits-Expenses-Assets-Dividends).
For example, if you are paying a utility bill you would debit accounts payable and credit cash. , In your accounting journal, debit the Cash account and credit the Customer Deposits account in the same amount. , Note on the invoice the amount of the deposit previously paid and subtract it from the total amount owed. , Credit the Revenue account while debiting Accounts Receivable and Customer Deposits.
Revenue is recognized when the work has been done and the customer has been billed, not when the money is received. -
Step 3: Record the amount of the deposit that the customer makes.
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Step 4: Send an invoice to the customer for the work after it has been completed.
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Step 5: Record that the invoice has been created and apply the deposit amount.
Detailed Guide
While a customer deposit sounds like straight income to you, it is in fact a liability to the business because you "owe" the customer something.
This is why you need to create a special account.Think of an account as like a line item on your personal budget.
Check to make sure that this "Customer Deposits" account has not already been created under another name.
All financial transactions must be entered in the company's general financial ledger.
Each transaction is listed as a debit or credit and for every debit there must be a credit.
Debits increase expenses, assets (such as cash or furniture) and dividend accounts.
Credits decrease these accounts.
An easy way to remember this is D-E-A-D (Debits-Expenses-Assets-Dividends).
For example, if you are paying a utility bill you would debit accounts payable and credit cash. , In your accounting journal, debit the Cash account and credit the Customer Deposits account in the same amount. , Note on the invoice the amount of the deposit previously paid and subtract it from the total amount owed. , Credit the Revenue account while debiting Accounts Receivable and Customer Deposits.
Revenue is recognized when the work has been done and the customer has been billed, not when the money is received.
About the Author
Carolyn Jordan
Creates helpful guides on crafts to inspire and educate readers.
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