Recording customer deposits and retainers

A deposit, a retainer, a prepayment — whatever the customer calls it, money that arrives before the work is done is not revenue. It is a liability: you owe that customer either performance or a refund, and your books should show the debt. Post it to a liability account (commonly "Customer deposits" or "Unearned revenue") at receipt, and move it to revenue only when the work is delivered.

The entry at receipt

Say Coastal Property Group pays a $4,000 deposit on a $10,000 job before work begins:

Account	Debit	Credit
Cash — operating checking	4,000
Customer deposits (liability)		4,000

No revenue line. The credit sits on the balance sheet as an obligation until you perform.

The liability account after a busy month of deposits looks like this:

Customer deposits (liability)

Debit	Credit
Applied to Coastal job invoice4,000	Coastal Property — deposit4,000
	Harbor & Finch — retainer2,500

Credits increase a liability; debits reduce it as work is earned. The running balance is work you have been paid for but not yet done.

The entry when you earn it

When the job completes, invoice the full $10,000 and apply the deposit:

Account	Debit	Credit
Customer deposits (liability)	4,000
Accounts receivable — Coastal Property	6,000
Service revenue		10,000

Revenue is recognized once, in full, when earned. The customer now owes only the $6,000 balance.

For a retainer drawn down over months, earn it in slices — each month, debit the liability and credit revenue for the amount worked. The remaining $6,000 receivable then follows the normal collections workflow.

Why the wrong way costs you

Booking deposits as income does three kinds of damage. Your profit-and-loss shows profit you have not earned — dangerous when deposits fund the very costs of performing. Your balance sheet hides a real obligation, so the cash looks spendable when it is spoken for. And when the final invoice goes out, the deposit portion gets double-counted as revenue unless someone remembers to net it — someone rarely does. Deposits misbooked as income are cousins of the other feed-categorization traps covered in the categorization system guide: the deposit hitting your bank feed should be matched to the liability, never categorized as sales.

Forfeited deposits

If the customer cancels and the contract says the deposit is yours, the obligation ends and income exists: debit Customer deposits, credit "Forfeited deposits" (other income). If instead you refund it, debit the liability and credit cash — and see handling refunds and returns for the family of related entries. Either way the liability account tells the truth the whole time, which is the entire point of putting the deposit there.