What is a customer deposit?

A customer deposit is cash paid to a company by a customer, for which the company has not yet provided goods or services in exchange. Customer deposits are commonly used in four circumstances:

• When a customer has such a poor credit record that the company requires it to pay in advance.
• When the goods ordered are so expensive for the company to produce that it requires a deposit from the customer in order to pay for the production of the goods.
• When goods are custom-designed to the specifications of the customer, and so cannot be resold if the customer were to renege on its purchase order.
• When the customer wants to reserve goods without yet taking delivery.

The company receiving a customer deposit initially records the deposit as a liability. Once the company performs under its contract with the customer, it debits the liability account to eliminate the liability, and credits a revenue account to record the sale.

A customer deposit is usually classified as a current liability, since the company typically provides services or goods within one year of the deposit being made. If the deposit is for a longer-term project that will not be resolved within one year, it could instead be classified as a long-term liability.

Related Topics

Layaway sales
Membership fees
Revenue recognition criteria