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Accepting Prepayments from Customers

Do you perform custom work or services for your customers? Do you take a deposit from the customer before beginning the agreed-upon project?

There are a couple of ways to accept deposits from customers before an invoice has been created.  Today, we will examine one of them and how reports are affected using this method.

The first step is to create an account for posting the deposits we receive. This will be an Other Current Liability type of account. We will name it “Customer Deposits.”


Once we have the account, we can create the item or product/service, we will use to invoice customers for the deposits we require from them.

When creating the new product/service, QuickBooks Online (QBO) will ask what type we want to create. Service is the type we are using in the example and the best choice. We definitely do not want to choose Inventory item.

We have named our new item “Customer Deposit.” It is not a sub-product/service.

For a description, the item in the screenshot uses “Initial deposit.” This is what will show on the invoice to the customer by default. We can add any description we want at the time we use the item to create an invoice.

Unmark the item so it is not taxable. Be sure and use the Customer Deposit account just created in the Income account field. Very important.

This is not an item we would use in purchase transactions, so you can unmark the checkbox labeled “I purchase this product/service from a vendor.”

Now we are ready to invoice our customer for that initial payment we need before starting the next project for them.

The above invoice will be part of the customer Bill’s Windsurf Shop’s balance until it is paid. The amount of the invoice is not income. It shows as a liability on the balance sheet. This is money we have, but have not done the work to earn the revenue yet.

The screenshot of the above balance sheet shows the liability balance of the amount we just invoiced Bill’s Windsurf Shop.

When it comes time to invoice the customer for the entire job, taking the deposit into account, we can create an invoice that looks like the following:

This method has two advantages. One, it correctly states the Accounts Receivable balance on financial reports and does not show the customer’s deposit as income. Two, it allows the deposit to be shown deducted from the final invoice total where the customer can see they are receiving that credit.

Hector Garcia, CPA
Certified Advanced QuickBooks ProAdvisor
7791 NW 46th St. Suite 109
Doral, FL 33166

Hector Garcia

Hector Garcia

Hector Garcia is a CPA and QuickBooks Consultant.

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