# How to Record Customer Deposits Before the Work

- Author: AutoBankConvert (https://www.autobankconvert.com)
- Published: 2025-11-26
- Updated: 2025-11-26
- Category: Transaction coding
- Canonical: https://www.autobankconvert.com/blog/record-customer-deposits

> How to record customer deposits taken before the work is done: post them to a liability, move them to sales when earned and match the bank deposit.
To record customer deposits taken before the work is done, post the incoming bank deposit as a debit to checking and a credit to a customer deposits liability account, not to sales. When the job is finished and invoiced, apply the deposit against the invoice so it moves into sales, and the liability returns to zero.

## Why is a customer deposit a liability and not a sale?

A customer deposit is money a customer pays before the business has done the work or delivered the goods. Until the business performs, it owes the customer either the work or, in many cases, the money back. That obligation is a liability. Sales are earned by doing the work, not by receiving cash.

Recording deposits as sales causes a predictable distortion. A contractor who takes $6,000 in December for a job done in February shows December income that was not earned in December, and February shows a large job with only part of its revenue. Both months misstate profit, and if December is the last month of the tax year, the wrong year carries the income.

Names vary by client and system. "Customer deposits," "Unearned revenue," "Deferred revenue" and "Customer prepayments" all describe the same kind of account. Pick one with the client's CPA and use it for every deposit.

The word "deposit" also has two meanings on a bank statement. Every incoming line is a bank deposit. Only money paid in advance for future work is a customer deposit. This post uses "customer deposit" throughout for the second meaning.

## Recording a customer deposit from the bank statement line

A customer deposit arrives as an ordinary incoming line on the bank statement, such as a mobile check deposit, a card payout or an ACH credit. Code it as a debit to checking and a credit to customer deposits, and name the customer and job in the memo so it can be applied later.

The bank line rarely tells you it is a deposit rather than payment of an invoice. Look for these clues:

- **No open invoice for that customer.** Money from a customer with nothing billed is often a deposit.
- **A round amount.** Deposits are frequently a percentage of a quote, such as 30% or 50%.
- **A signed quote or contract** that names a deposit due at signing.
- **A memo from the customer** on a check or transfer, such as "deposit kitchen job."

Many accounting systems have their own way to hold a deposit against a customer, such as a sales receipt to a liability account or a retainer feature. Use whichever the client's system supports, as long as the money lands in the liability, not in income.

Card payouts need one extra step. If the deposit was paid by card, the bank shows the payout net of processing fees. Record the full deposit amount to the liability and the processor fee to merchant fees, so the customer's balance shows what they actually paid.

## Moving a customer deposit into sales when the job is done

A customer deposit moves into sales when the business finishes the work and issues the final invoice. The invoice records the full sale. The deposit is then applied against that invoice, which reduces the liability and leaves only the balance due from the customer. The deposit itself never posts to sales directly; the invoice does that job.

### Worked example: a $20,000 job with a $6,000 deposit

The figures below are an example for a fictional renovation contractor.

| Date | Event | Entry |
| --- | --- | --- |
| November 18 | Customer pays deposit by check | Debit checking 6,000.00, credit customer deposits 6,000.00 |
| February 20 | Job finished, final invoice issued | Debit accounts receivable 20,000.00, credit sales 20,000.00 |
| February 20 | Deposit applied to the invoice | Debit customer deposits 6,000.00, credit accounts receivable 6,000.00 |
| March 6 | Customer pays the balance | Debit checking 14,000.00, credit accounts receivable 14,000.00 |

After March 6, customer deposits is back to zero for this job, accounts receivable is zero, and all $20,000 of sales sits in February, the month the work was done.

### Jobs billed in stages

Longer jobs are often billed in milestones, with the deposit applied to the first invoice or spread across several. Follow what the contract says. If the contract applies the deposit to the final invoice only, the liability stays open for the life of the job, and that is correct. Note the plan on the job's record so the deposit is not applied twice.

### Materials bought with the deposit

Some businesses take a deposit to buy materials for the customer. Spending the deposit does not change its treatment: the materials are a cost of the job, and the deposit is still a liability until the work is invoiced. Costs that will be passed on to the customer at cost or with a markup are covered in the guide to [recording billable expenses](/blog/record-billable-expenses).

## Matching customer deposits to jobs and bank lines

Matching links each bank line to one customer and one job, so the deposit can be applied to the right invoice months later. Without the match, deposits pile up in the liability account with no way to tell who paid what. Make the match on the day the deposit is coded, while the client still remembers it.

A simple matching routine:

1. Ask the client to send each signed quote or deposit request when it goes out.
2. When a new incoming line appears, compare it with the open requests by amount and customer name.
3. Code the line to customer deposits with the customer and job in the memo.
4. If a deposit matches no request, hold it for the client rather than guessing.

For clients who take many deposits, such as event venues or custom manufacturers, consider one sub-ledger per customer in the accounting system. A deposit then sits under the customer's name and appears when their invoice is created.

Bank lines from repeat customers follow patterns that rules can catch, but a deposit and an invoice payment from the same customer look alike. [AutoBankConvert](/) codes incoming lines from each client's own rules and coding history; when it cannot tell which of the two a payment is, the line waits for you with its best guess attached, and you make the call.

## What happens when a customer deposit is refunded or kept?

When a job is cancelled, the deposit is either returned to the customer or kept by the business, depending on the contract. A refund reverses the liability against cash. A deposit the business keeps under the contract moves from the liability into income. Either way, the customer deposits account for that job ends at zero.

**Full refund.** The bank shows money going back to the customer. Debit customer deposits and credit checking for the refunded amount.

**Partial refund.** The contract lets the business keep part of the deposit, perhaps to cover design work already done. Debit customer deposits for the full deposit, credit checking for the refund, and credit an income account for the part kept. Ask the CPA which income account suits forfeited deposits.

**Deposit kept in full.** If the customer walks away and the contract says the deposit is nonrefundable, move the full amount from customer deposits to income on the date the job is formally cancelled.

**Deposit transferred to another job.** A customer who switches to a different project may ask for the deposit to carry over. Move it in the memo or sub-ledger to the new job; the liability balance does not change.

Do not leave cancelled deposits sitting in the liability. They make the balance sheet show money owed to customers who are gone.

## Incoming money that is not a customer deposit

Several kinds of incoming money look like customer deposits on a bank statement but are something else. Coding them to the customer deposits liability overstates what the business owes customers and hides the real transaction. Check the payer and the paperwork before you post any advance-looking line.

- **Loan proceeds.** Money from a bank, an online lender or a line of credit is debt to the lender, not an advance from a customer. The guide to [recording loan proceeds](/blog/record-loan-proceeds) covers how to set up the loan account from the deposit.
- **Payment of an invoice already issued.** It reduces accounts receivable. Treating it as a deposit leaves the invoice open and the liability overstated.
- **Owner money.** A transfer from the owner's personal account is a contribution or an owner loan.
- **Security deposits held for a customer's property.** A landlord's tenant deposit or an equipment rental deposit is also a liability, but one that is usually returned rather than applied to a sale. Keep it in a separate account from customer deposits.
- **Gift cards and store credit.** These are a liability too, but usually tracked separately because they are redeemed by many people over time.

## An open customer deposits schedule for month end

An open customer deposits schedule lists every deposit not yet applied or refunded, and its total must equal the customer deposits balance in the books. Running it each month end catches deposits applied twice, deposits never applied and cancelled jobs that were never cleared.

An example schedule for the fictional contractor at January 31:

| Customer and job | Deposit date | Amount | Expected invoice |
| --- | --- | --- | --- |
| Lopez kitchen | November 18 | 6,000.00 | February |
| Chen deck | December 9 | 2,500.00 | March |
| Patel bathroom | January 22 | 4,200.00 | April |
| **Total open deposits** | | **12,700.00** | |
| Customer deposits per books | | 12,700.00 | |

Review the oldest rows first. A deposit more than a few months past its expected invoice date usually means the job finished and the deposit was never applied, which leaves both accounts receivable and the liability overstated by the deposit amount.

Most of this tracking lives in the accounting system rather than in the bank data. The guide to [bookkeeping automation software](/blog/bookkeeping-automation-software) compares tools that help with recurring work like this alongside the bank side of the month.