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Customer Deposits, An Easier Way

In our last post we reviewed a way to handle customer deposits or prepayments in QuickBooks Online (QBO). That method involved setting up a special account on the chart of accounts, a new product/service item, and including the customer deposit item on sales documents like invoices.

For some QBO users, that will be the best solution. For others, an easier procedure will suffice.

Let’s say our sample company, Craig’s Design and Landscaping Services is going to do a landscaping job for their customer, Cool Cars. But, we want $2000 up front before we begin the project.

We can use a receive payment transaction to accomplish that. Even though there is no open invoice for Cool Cars, we can still create the payment from them. It will become a credit on their account with Craig’s.

How does this appear on reports?

The method for customer deposits we reviewed before created a liability on the balance sheet showing that we had taken the $2000 payment but had not done the work nor recorded the income for it yet.

In this case, we have received the payment and it reduces the balance in accounts receivable. So, if our customers, in total, owed us $15,000 before we recorded Cool Cars’ payment, our reports would show that customers owed us $13,000 after the payment was received.

There is an important exception to this. Normally, we would see the accounts receivable balance on a balance sheet report. The balance sheet can be viewed though on either an accrual or cash basis.

We don’t have time or space to explore the differences between cash and accrual accounting here, but basically, cash basis records accounting transactions as the cash is received or disbursed.

In that case, there is no accounts receivable balance. So what becomes of our customer deposit taken through the receive payments function on cash-basis reports?

The above screenshot is a cash basis profit and loss report for Craig’s Design. The $2000 that did not apply to any invoice, but was only a customer credit, has become Unapplied Cash Payment Income.

If we were to view a balance sheet, there would be no accounts receivable balance.

When the time comes to produce the final invoice for the customer Cool Cars, we can create it for the full value of the sale.

Note that QBO has automatically applied the credit to the invoice. This is a setting. While it’s convenient for many, it may not work for you. If not, change the setting.

Settings (gear icon), Company Settings, Advanced, Automation.