Customer paid a deposit & 1st month for a rental a few years ago. I issued his final invoice and he wants to use that deposit to pay for it. How do I record it?

You took the deposit back in 2018, so the money is in your bank, it should also be in some liability account for customer deposits. You need to look back at the item used in 2018 for the deposit to find what account it went to.

I would imagine that your rental item posted to income, just my guess since I can not see your data. If so create a service item called one time use and link it to Retained Earnings.

Use that item on the last months rent invoice, set the qty to negative one, and enter the amount, save the zero dollar invoice.

Hi

Here is a little more detail. Back in 2018, my old accountant told me to create an "Item" as a "Inventory Part". I created the Item using:

COGS Account: Rental - Temporary Boiler (Expense)

Income Account: Rental (Income)

I entered my vendor's bill, both the monthly rental and the deposit was recorded under this new "Boiler Rental" item. Nothing listed under the Expense tab other than the freight charges. 

I issued the 2018 customer invoice by bringing the two items under "Add Time & Costs" 

When the customer paid the invoice, it was recorded like any other customer.

Debit to Undeposited Funds (Other Current Asset)

Credit to Accounts Receivable

Do I still create the "One Time Use" Service Item as mentioned below and use that account to "pay" for this 2020 final invoice?