Liability vs. Income: Customer Deposit /Retainer/Advance
A quick accounting lesson: A liability is a value that you owe someone. It could be for something that you purchased on account, money you borrowed or an asset that is financed through a bank. Why, then, is money that a customer gives you before you begin a service considered a liability? Simply put, because you owe them something back for the same value. You may owe them the money back if you don’t start the project or if the item is returned. Until you have provided the service or the item for the money up front, it is considered a liability. It is not considered income unless you are on a cash basis, but you still owe the money to the customer.
To track these liability transactions in QuickBooks, we set up the following structure:
- Create a Customer Deposit account (Also labeled Customer Retainers or Customer Advances) that is an Other Current Liability type.
- Create an Other Charge type item named Customer Deposit and map it to the Customer Deposit liability account.
- To receive the money, set up the Customer:Job and use a Sales Receipt to accept the money. Use the Customer Deposit item with a positive value.
- When you finally invoice the customer for the product and service, reduce the invoice amount using the Customer Deposit item with a negative value.
The great news is that there are reports that you can develop to give you the detail behind the Customer Deposit account balance and you can reconcile this Other Current Liability account to make sure all deposits have been applied. Call us to set up a very important accounting transaction and don’t be caught owing more than you can pay back!
