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.
