How to record a customer deposit
Updated 5 min readWritten by the WIPKeep team
The short answer
A customer deposit is recorded as a debit to your bank account and a credit to Unearned Revenue, which is a liability. It is not income yet, because you have not done the work. When the job finishes, you move the deposit out of Unearned Revenue and into revenue, and only then does it count toward your profit.
Key takeaways
- A deposit increases your cash and increases what you owe the customer in work. It is a liability, not income.
- Recording a deposit as income is the single most common bookkeeping mistake in the trades. It inflates this year's profit and hands you a tax bill on money you have not earned.
- The deposit becomes revenue at the moment the job is complete, not the moment the money lands.
- If you take deposits and your year ends mid-job, the unearned balance belongs on your balance sheet as of December 31.
You sign a kitchen remodel. The customer hands you a check for $8,000 up front so you can order cabinets. The money is in your account. The work has not started.
That $8,000 is not yours yet in any meaningful sense. If you walked away tomorrow you would owe it back. Accounting has a specific way of saying that, and it is worth learning because it protects you at tax time.
The entry
| Account | Debit | Credit |
|---|---|---|
| Business Checking | $8,000.00 | |
| Unearned RevenueAlso called customer deposits or deferred revenue | $8,000.00 | |
| Total | $8,000.00 | $8,000.00 |
Debits equal credits. Cash went up, and so did your obligation to deliver work. Nothing has touched your profit and loss statement yet.
The debit is easy: money arrived in the bank, so the bank account goes up. The credit is the part people get wrong. Unearned Revenue is a liability account, which means it sits on your balance sheet alongside things like loans and unpaid bills. It represents work you owe.
Why it is not income yet
Revenue is recognized when you have done the thing you were paid to do. That principle is not bookkeeping pedantry, it is what keeps your numbers from lying to you. Consider the alternative.
Say you take three deposits worth $22,000 in November and December, order materials in January, and finish the jobs in February. If you booked those deposits as December income, your year would end showing $22,000 of profit that does not exist, with none of the offsetting costs, and you would pay tax on it. In February, when the actual work and the actual costs land, your books would show a loss.
What happens when the job finishes
The job wraps in February. Total contract price is $24,000. The $8,000 deposit gets applied and the customer owes the remaining $16,000. Two things happen at once: the liability clears, and revenue is finally recognized.
| Account | Debit | Credit |
|---|---|---|
| Unearned RevenueClearing the deposit you were holding | $8,000.00 | |
| Accounts ReceivableWhat the customer still owes | $16,000.00 | |
| RevenueThe full contract price, recognized now that the work is done | $24,000.00 | |
| Total | $24,000.00 | $24,000.00 |
Debits equal credits. The liability is gone, the revenue is real, and the receivable tracks what is still owed.
Note that the deposit never passed through your income statement twice. It went in as a liability and left as part of one single revenue recognition. That is the whole point of the exercise.
Common variations
The deposit covers the whole job
Same entry, no receivable. At completion you debit Unearned Revenue and credit Revenue for the full amount, and nothing is left owing.
The customer cancels
If you refund it, you debit Unearned Revenue and credit your bank account, and the liability disappears without ever becoming income. If you keep it under your contract terms, it becomes revenue at that point, because the obligation ended.
You spend the deposit on materials before finishing
That is normal and it is exactly why deposits exist. The materials purchase is its own entry and does not touch Unearned Revenue. See how to record materials bought for a job.
Where contractors get caught
- Treating the bank balance as profit. A healthy checking balance in December can be almost entirely other people's deposits. The balance sheet tells you which part is yours.
- Losing track of which deposit belongs to which job. If deposits are not tagged to a job, applying them correctly at close becomes guesswork.
- Forgetting the year-end position. If your fiscal year ends with jobs open, every unapplied deposit should still be sitting in Unearned Revenue on December 31.
Frequently asked questions
- Is a customer deposit income?
- No. A deposit is a liability until the work is done, because you still owe the customer either the work or their money back. It becomes income at the point the job is complete.
- What account does a customer deposit go into?
- Unearned Revenue, which some systems call Customer Deposits or Deferred Revenue. It is a liability account on the balance sheet, not an income account.
- Do I pay tax on a deposit I received in December for a job I finish in March?
- That depends on your accounting method and your circumstances, and it is a question for your tax preparer. What the bookkeeping does is keep the deposit identifiable as a separate balance so the answer can be applied correctly instead of guessed at.
- What if I already recorded deposits as income?
- The fix is a correcting entry that moves the amount out of revenue and into Unearned Revenue for any job that is still open. If the year is already closed and filed, talk to your tax preparer before changing anything.
Keep reading
- Journal entriesHow to record a payment to a subcontractorThe journal entry for paying a sub, how it differs when the cost belongs to a job, and what you have to track during the year so 1099 time is not a scramble.
- Journal entriesHow to record materials bought for a specific jobThe journal entry for job materials, why the receipt should hit the job and not a general supplies account, and how to handle materials you buy but do not use.
- Journal entriesHow to record a work truck bought with a loanThe journal entry for a financed vehicle, why the loan payment is not an expense, and how to split each payment between principal and interest.
- Journal entriesHow to record a business expense you paid for personallyYou grabbed job materials with your personal card. Here is the journal entry, why it goes to owner's equity, and how to keep business and personal money straight without a second bank account.