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Accounting Principles for Deposits
Accounting Principles for Deposits

How to account correctly for deposits paid in advance

Rob Smith avatar
Written by Rob Smith
Updated over a week ago

Disclaimer: Whilst Slick's Chief Technology Officer and Co-Founder is also a Chartered Accountant, we are unable to give advice to individual businesses. We recommend speaking to your own Chartered Accountant for advice pertaining to your circumstances and business model.

What is a deposit?

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 if the service is cancelled, 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. Since there are no cash earnings, the money is debit to the bank and credit to the customer's deposit account. It is not considered revenue as the service or sale of goods has not yet occurred. It is therefore considered a liability on your balance sheet.

Summary

In accounting, the two opposites on your Balance Sheet are Assets and Liabilities. Remember the simple definition:

  • Assets = everything you OWN

  • Liabilities = everything you OWE

Deposits are liabilities as you have not yet provided the service so in theory the client could ask for their money back and you would need to repay the deposit.

Once the service has been provided, the deposit and the balance become revenue on your P & L

Example of a Customer Deposit

In accounting, it is essential to observe the double-entry rule. When Salon XYZ takes a booking for a customer, it is common to request a deposit of 50% of the final bill. When the payment is made, the company will debit cash and credit the customer deposit account as a current liability. When the service takes place, Salon XYZ will then debit customer deposits and credit sales revenue with the same amount.

This means that the 50% deposit is transformed from a liability to an asset or revenue at the point the service is checked out and completed.


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