How do you record a customer deposit you receive before you invoice?

As a liability: debit the bank, credit customer deposits. When you deliver and invoice, apply the deposit to that invoice, so the customer owes only the balance. The part most guides skip is month end, when an unapplied deposit makes receivables, liabilities and sometimes revenue wrong, and the trial balance still balances.

Two entries in, one entry out.

A deposit is cash for goods or services you have not delivered yet. Under IFRS 15 paragraph 106, a payment received before you transfer the goods is a contract liability from the day it arrives, and paragraph B44 says it becomes revenue when you deliver. ASC 606 takes the same approach under US GAAP. Here is one example month.

The example October

One entity, October 2026, amounts before any tax

Customer A
  6 Oct    orders goods for 100,000, pays a 30% deposit    30,000
  27 Oct   goods delivered, invoice raised for            100,000
           balance due 26 November                         70,000

Customer B
  already owes a September invoice, due 25 Oct, unpaid    50,000
  14 Oct   orders goods for December delivery              80,000
           pays a 25% deposit                              20,000

The entries

                                        Dr          Cr
6 Oct    Bank                       30,000
           Customer deposits                    30,000

14 Oct   Bank                       20,000
           Customer deposits                    20,000

27 Oct   Accounts receivable       100,000
           Revenue                             100,000

27 Oct   Customer deposits          30,000
           Accounts receivable                  30,000

At 31 October
  Accounts receivable   A 70,000 + B 50,000  =  120,000
  Customer deposits     B 20,000             =   20,000
  October revenue       A                    =  100,000

The fourth entry is the one that matters. Revenue is recognised on the invoice as usual, and the deposit then settles part of that invoice, the same as a payment would. Customer B’s deposit stays a liability, because its goods go out in December.

Four ways the same month gets booked.

All four of these balance. Only the first is right.

The example October at 31 October, before tax. In each wrong row, everything not named is booked as in the first row.
Treatment	Receivables	Customer deposits	October revenue
Recorded and applied as above	120,000	20,000	100,000
A’s deposit never applied to the invoice	150,000	50,000	100,000
Both deposits credited to revenue, A invoiced for 70,000	120,000	0	120,000
B’s deposit left as an unapplied credit in receivables	100,000	0	100,000

The example October at 31 October, before tax. In each wrong row, everything not named is booked as in the first row.

The second row is the most common. The invoice goes out for 100,000 and nobody applies the deposit, so both sides of the balance sheet carry an extra 30,000. The aging shows Customer A owing 100,000, and if dunning runs off the aging, Customer A gets a reminder for money they paid in October.

The third row puts 20,000 into October revenue for goods that ship in December. It usually happens when deposits are entered as sales receipts against an income account.

The fourth row is what happens when the deposit is entered as a customer payment with nothing to apply it to. It sits as a credit inside receivables and nets Customer B down to 30,000, which hides a 50,000 invoice that is past due. Paragraph 105 presents each contract as one position and any unconditional right to payment separately as a receivable, so a prepayment on one order does not reduce what the customer owes on another. The help article from QuickBooks covers recording a deposit to a liability and taking it off on a later invoice, but not the aging, the month end check, or tax.

In the UK, VAT is due when the deposit arrives.

HMRC treats a deposit that is meant to form part of the price as creating a tax point when it is received (VATTOS5120), and that holds even when the deposit is refundable (VATTOS5125). Genuine security deposits are the exception. So a VAT inclusive deposit splits on receipt.

Customer B’s deposit with UK VAT

Customer B is in the UK, VAT at 20%, deposit includes VAT

14 Oct   Bank                       20,000.00
           Customer deposits                    16,666.67
           VAT payable                           3,333.33

The 3,333.33 goes on the return for the period that
includes 14 October. The December invoice charges VAT
only on the part of the price the deposit did not cover.

Outside the UK the timing differs, so check the rule wherever you charge tax. What stays the same is that the deposit record needs a tax amount, or the return and the final invoice will not agree with each other.

A five minute deposit check at month end.

List open deposits by customer. The total must equal the customer deposits balance in the ledger, 20,000 in the example.
Each open deposit should point to an order that has not been invoiced yet. A deposit whose order has been invoiced is the second row of the table: apply it.
Look for credits inside receivables. Any customer with a credit balance either has an unapplied deposit that belongs in the liability, or is owed a refund.
Review deposits older than your normal lead time. The order may have been cancelled, and the deposit needs a refund or a decision.
Keep the opening and closing balance, and the revenue that came out of the opening balance. IFRS 15 paragraph 116 asks for both, and a first audit will ask for the list behind them.

Recording deposits in Rivane today.

Rivane keeps a deposit as its own record against the customer, and posts it straight to a customer deposits liability rather than to revenue or receivables. Applying it to an invoice is a separate step that moves it out of the liability and reduces that invoice.

Customer deposits in Rivane, as built

# A customer deposit in Rivane, as built.

screen           New Customer Deposit: customer, date, amount,
                 deposit type, bank account
deposit types    Security Deposit, Earnest Money, Retainer,
                 Prepayment, Other
on save          with a bank account chosen, posts
                 Dr bank, Cr Customer Deposits in the same
                 transaction as the record; the deposits
                 account comes from its account role unless
                 you name another one
shown            total, remaining balance, activity

# Applying it to an invoice (API today, no screen yet)
create           a deposit application: invoices and amounts,
                 saved as a draft
post             Dr Customer Deposits, Cr accounts receivable
                 for each invoice; the invoice balance due
                 drops and it shows Partial or Paid; the
                 deposit's remaining balance drops
refuses          an amount above the invoice balance due, an
                 invoice that is not posted or is voided

Some limits, as of today. Applying a deposit is an API call; there is no screen for it yet. Nothing applies a deposit automatically when you raise the invoice, so between the two, the aging shows the full amount, and the month end check above is still worth running. The deposit record has no tax field, so in the UK the VAT on a deposit needs a journal entry, and the final invoice’s tax needs adjusting by hand. Voiding a deposit marks it void without reversing the receipt entry, so a voided deposit also needs a reversing journal.

The short version.

Book a deposit to a liability, never to revenue and never as a loose credit in receivables. Apply it to the invoice for its own order when you deliver. At month end, tie open deposits by customer to the ledger and to orders not yet invoiced. In the UK, take the VAT out when the deposit arrives. In the example, that is receivables of 120,000, deposits of 20,000 and revenue of 100,000.

To see how Rivane handles invoices, payments and the aging, read Rivane accounts receivable.

Frequently asked questions.

Is a customer deposit the same as deferred revenue?

Both are contract liabilities in IFRS 15 terms, and paragraph 109 lets you use other names on the balance sheet. Many companies keep a customer deposits account for cash received before any invoice and a deferred revenue account for amounts invoiced but not yet earned. Either works if each balance can be tied to the orders behind it.

Should a deposit lower the customer’s balance on the aging report?

Only once it is applied to the invoice for the order it paid for. Until then it is money you owe the customer in goods or services, not a payment against what they owe you on another order.

What about US sales tax on deposits?

The rules differ by state, and the UK rule in this article does not carry over. Check when tax becomes due on an advance payment in each state where you collect it.

Sources

A note on how this was researched. IFRS 15 paragraphs 105 to 109, 116 and B44 were read in the text the EU published, downloaded and read directly. Both HMRC manual pages and the QuickBooks help article were read in full. The customers, orders and every amount are examples. The Rivane section describes the product as built today, checked against the customer deposit code rather than marketing copy. This is not accounting or tax advice for your specific case.

On embedded social posts: we looked for public posts from standard setters or practitioners on recording customer deposits and found none we could verify as current and relevant, so this article uses ordinary citations instead.