Customer deposit definition
/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. The company has an obligation to provide the indicated goods or services, or to return the funds. For example, a customer asks a retailer to reserve a tuxedo for him, to be picked up a month later; the retailer requires payment of a customer deposit before it will agree to hold the suit.
When to Require a Customer Deposit
Customer deposits are commonly used in the following four situations:
Poor credit. When a customer has such a poor credit record that the company requires it to pay in advance.
High cost. When the goods ordered are so expensive for the company to produce that it requires a deposit from the customer to pay for the production of the goods.
Customized. 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.
Held goods. When the customer wants to reserve goods without yet taking delivery.
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Types of Customer Deposits
There are many types of customer deposits, which include the following:
Security deposits. Funds collected to guarantee the return of goods or fulfillment of a contract, often used in rentals or utility services. They are usually refundable if terms are met.
Advance deposits. Payments made by customers before goods or services are delivered, commonly seen in hotel bookings or event reservations.
Installment deposits. Partial payments toward a total balance due, used in layaway or installment purchase agreements.
Utility deposits. Collected by utility companies to ensure payment of future bills, particularly from new or high-risk customers.
Subscription deposits. Payments made upfront for ongoing services, such as magazine or software subscriptions.
Bid or Tender deposits. Funds submitted with a bid to demonstrate serious intent; forfeited if the bidder withdraws after acceptance.
Retainer deposits. Advance payments made to secure future services, especially common in legal or consulting arrangements.
Escrow deposits. Funds held by a neutral third party until certain conditions are met in transactions like real estate sales.
Accounting for a Customer Deposit
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. This may occur in stages, if deliverables are sent out over a period of time.
The company does not initially incur any sales tax liability when it accepts a deposit from a customer. This liability is only created once the company delivers under its contract with a customer and converts a deposit into a sale transaction.
Presentation of Customer Deposits
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. A sample presentation of a customer deposit is noted in the following exhibit, which contains a balance sheet.
