Correctly accounting for customer deposits

A customer deposit sounds like a simple item, yet this is one of the most common areas where accounting can go wrong. What is a customer deposit exactly? While a customer deposit sounds like straight income, it is in fact a liability to the business. Yes, cash is received by the business, and yes this cash increases the assets of the company. When a customer gives funds to a business prior to receiving the goods or services, the business “owes” the customer something. The customer is agreeing to pay in advance for what the business will provide in the future.

Businesses are not, by law, permitted to receive payments for goods or services for which they have not fulfilled and treat it as revenue. The proper place to account for a customer deposit is typically within current liabilities. Once a business has fulfilled on the obligation created by the deposit, the revenue can be recognized. At this point the liability is removed from the balance sheet.

Accounting for a customer deposit is critical to accurate monthly or period based accrued financials. If a customer deposit is accounted for as income, when in fact the obligation is still pending, revenue is overstated for the current period. When revenue is overstated in one period, it will be understated in the following. This results in inaccurate financial reporting and potentially disastrous decision making.

Written by:
Andrea Steinbrenner
TGG Accounting


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