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Anonymous
Not applicable

Community Questions: How to Setup Deposits in QuickBooks Online

Bar_Nine_-_Secondary_-_Environmental_-_Employee_and_Customer.png

 

Allowing customer deposits (some people may call these retainers or prepayments) is one way you can directly impact your client’s success.

 

Imagine this scenario: You’ve spent months helping your client get ready to open their business. Instead of asking for full payment upfront, you let them put down a deposit and then delivered the products and services they needed to get the job done. This flexibility helped the client open on time and under budget.

 

Community member @bluelake recently asked how to set up their accounts so customers have the option to pay in full or put down a deposit for their customized bumpers. It’s an important question. Delighting customers is about more than delivering great products or services – it’s about building mutually supportive relationships.

 

The accounting can get tricky (there are special rules for certain industries, check with your accountant if you’re feeling unsure). No matter what you call it (deposit, retainer, prepayment), we're here to show you how to handle a situation where you received money that you haven't earned and shouldn't record as income, yet. Ready? Let’s get started!


Create a Liability Account

 

The first thing you need to do is create a liability account to hold the deposit until it’s applied to the final customer invoice. Deposits are treated as a liability (not income), which shows that although the business is holding this money, it doesn't belong to you until it's used to pay for services.

 

Screenshot (17).png

 

  • Go to your Chart of Accounts and create a new account. Select “Other Current Liabilities” for the Category Type and “Trust Accounts – Liabilities” for the Detail Type. Name the account something clear and easy to remember, such as “Customer Deposits/Retainers.

 

 

 

 

Create a new “deposit” item and link it this new liability account

 

Next, map a “deposit” item to the new liability account that you can send to your customers in an invoice (or sales receipt).

  • Go to your Products and Services list and create a new service item. Give the item a simple name, like “Customer Deposit.” Next, select your new “Customer Deposits/Retainers” liability account from the Income Account drop-down menu. Leave the sales price/rate field blank since this value will change for every customer.

    Important - be sure to uncheck the “Is taxable” box.

    Screenshot (18).png

     

  • Pro tip – for added transparency, include the following in the item’s description:

    Customer deposit for: [   ]
    Total Due:

    Deposit Amount:
    Remaining Balance:

 

  • Click “Save and Close.” Go back to your Products and Services List and you will see your “Customer Deposit” item.

 

 

 

 

Collect the deposit

 

You now have a liability account and a connected “Customer Deposit” item. You’re ready to collect deposits!

 

  • Create a new invoice for your customer. Add the “Customer Deposit" item as a line item and enter the deposit amount in the rate column. Make sure tax is not included and the “Balance due" matches what your customer agreed to pay. 

    Note: if you’ve already received the deposit payment before sending the invoice, create a sales receipt and follow these steps.


    Screenshot (19).png

     

  • Once you receive the payment, follow your normal payment process. You can verify that you received payment by going to the Customers Tab checking the customer's account. 

 

 

 

 

Send the final invoice and apply the deposit

 

After you receive the deposit, send your customer the final invoice.

 

  • Create the final invoice and include all goods and services related to the deposit. The cost for these items should match the initial total due amount, not the remaining balance amount.

    Important: if items are taxable, once you deliver the product and service, now is the time to apply tax - and make sure you calculate for the total amount due. 

  • Now it’s time to apply the deposit. Once again, add the same “Customer Deposit” line item. This time, instead of recording a positive (+) value in the rate column, enter the amount as negative ( - ) value. In the description section, add the words “Deposit Applied.”

     

    Screenshot (20).png

 

 

 

 

 

Need a numbers check? 

 

There’s a simple way to verify if you recorded the deposit correctly.

 

  • After you send the initial deposit invoice, go to your Chart of Accounts and select “view register” for the “Customer Deposits/Retainers” liability account. You will see the initial “Customer Deposit” item and an increase for the deposit amount.

  • Once you apply the deposit to the final invoice, check your Chart of Accounts again. You will see another “deposit” item and a decrease for the deposit amount, resulting in a $0 ending balance for the two items.

    Chart of Account.PNG

     


Now it’s your turn

 

Do you let your customers make deposits? Has it improved your relationship with customers? 

12 Comments
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Level 1

Community Questions: How to Setup Deposits in QuickBooks Online

Dear James,

 

In our line of business, we appoint sub-contrator to perform work on our behalf and while paying then we withheld 10% of the sub-contractor invoice value as Retainer for usually a period of 6 months. This is to meet any liability arising out of Faulty work. How do i record it in Quickbook.

 

Example - Sub-Contractor contract value = 50,000; we pay them 45,000 at the completion of the work and retain 5,000 for 6 months.

 

I want to record all Sub-Contractor seperately showing there Retention Amount.

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Level 6

Community Questions: How to Setup Deposits in QuickBooks Online

Hi,

 

Thank you for sharing this with us. It was good and very informative. This is the correct way of treating customer advances and deposits. 

 

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Level 15

Community Questions: How to Setup Deposits in QuickBooks Online

A deposit is NOT the same thing as a retainer, though they are very similar

and retainers can be refundable or non-refunable- and are handled differently depending

 

A prepayment is definately NOT a retainer or a deposit, a pre-payment is income when received, cash or accrual basis

 

and deposits can be refundable - which is a company liability

or

non refundable which is income when reveived, cash or accrual

Highlighted
Level 1

Community Questions: How to Setup Deposits in QuickBooks Online

QB Enterprise Contractor

We've accepted deposits for years in this manner, and now find ourselves in trouble with the Department of Revenue over sales tax.  Applying payments in this manner hits the sales tax report in weird ways rendering it almost useless.  We didn't know this and neither did our accountant.  

On the receipt of the deposit - booking it as a liability is right, but at that time we shouldn't have to pay sales tax on the deposit.  It should be recorded upon the installation of our product.  So.. does anyone have a work around for this situation?  Just paying sales tax isn't an option.  Sometimes our deposits are over $100K .. 

 

Thanks in advance for the consideration.  

Highlighted
Level 15

Community Questions: How to Setup Deposits in QuickBooks Online


wrote:

QB Enterprise Contractor

We've accepted deposits for years in this manner, and now find ourselves in trouble with the Department of Revenue over sales tax.  Applying payments in this manner hits the sales tax report in weird ways rendering it almost useless.  We didn't know this and neither did our accountant.  

On the receipt of the deposit - booking it as a liability is right, but at that time we shouldn't have to pay sales tax on the deposit.  It should be recorded upon the installation of our product.  So.. does anyone have a work around for this situation?  Just paying sales tax isn't an option.  Sometimes our deposits are over $100K .. 

 

Thanks in advance for the consideration.  


On the sales receipt where you enter the receipt of the deposit, mark the deposit item non taxable

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Anonymous
Not applicable

Community Questions: How to Setup Deposits in QuickBooks Online

@MarvinMatrix

 

Thank you for sharing your experience. I am curious, could you share a little more? What did you do before when it came to taxes? Charged on the deposit? 

Highlighted
Anonymous
Not applicable

Community Questions: How to Setup Deposits in QuickBooks Online

@vpcontroller, how should @Huzefa record retainers for their sub-contractors? Should it hit the books differently? 

Highlighted
Level 1

Community Questions: How to Setup Deposits in QuickBooks Online

We had been receiving the deposits as payments into a Customer Deposit liability account, but they hit our sales tax reporting as a negative.  Our Accountant advised us to make credit memos instead apply against the Cust Dep account.  For years, that was our process, except Credit Memos hit the sales tax report as a credit, a debit and then a credit again.  SO.. we were underreporting our sales tax.  

Now we're back to receiving as payments and adjusting by hand, the sales tax report.  It's very cumbersome and frankly defeats the purpose.  

Highlighted
Level 1

Community Questions: How to Setup Deposits in QuickBooks Online

Just started using this method and discovered the same problem. 

Only checked the P&L when I ran a test project through before implementing and realized last week that although the delusityis mapping to the liability account on the balance sheet as expected, it is unexpectedly also reporting to sales tax revenue reports as well as sales reports as revenue.

There has to be a way to handle deposits that doesn’t do this, but I have yet to find or figure it out... so frustrating!

Highlighted
Level 15

Community Questions: How to Setup Deposits in QuickBooks Online

A refundable deposit, when received should be set to no tax

then when the deposit is applied to the sale, the sale item(s) are set to taxable, the deposit reduces the amount due, and sales tax is calcuted on the items marked as taxable.

Highlighted
Level 1

Community Questions: How to Setup Deposits in QuickBooks Online

Tried that yesterday, it still maps to sales tax total revenue and sales reports regardless of if the item is set as taxable or not. 

Highlighted
Level 15

Community Questions: How to Setup Deposits in QuickBooks Online

Odd, try setting the customer tax code to no tax

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