Journal Entry for Deposit Received

Deposit is the amount of cash that a customer paid to the company before receiving goods or services.

Some suppliers require customers to make deposits when placing orders. It happens when the purchase items are expensive. The supplier wants to ensure that the customer will show commitment when placing an order. It will be a problem when supplier gets the product ready and the customer cancels the order. They will lose working capital to maintain the expensive goods.

The landlord will require the tenant to pay a certain amount of deposit to rent the property. It is used as the security deposit that the landlord can keep and settle at the end of the rental contract. The tenant needs to comply with terms and conditions otherwise the landlord will keep the deposit.

When company receives deposits from customers, it will create the obligation to provide goods or services. The deposit will record on the balance sheet as the current liability. It has to stay as a liability until the company completes the transaction for the customer.

Journal Entry for Deposit Received

When the customer pays the deposit, the company needs to record cash received and customer deposit which is the liability account.

The journal entry is debiting cash and credit customer liability.

The transaction will increase the cash balance and create an obligation for the company to fulfill for customers.

The customer’s deposit will not stay forever on the balance sheet. It needs to reverse to the income statement at the right time. When the company provides goods or services to the customers, they need to record revenue as well. The company will reverse the customer’s deposit to the sales revenue account.

The journal entry is debiting customer deposit and credit sales revenue.

It will remove the customer deposit from balance sheet as the company has fulfilled the obligation. It is also the time to record revenue as the goods/services are delivered.

Journal entry for deposit received Example

ABC is a car manufacturer, when customers place an order, they require to pay a purchase deposit. On 01 August, Mr. A order a car and pay a deposit of $ 10,000. After a month, the car is ready and delivered to Mr. A. The selling price of the car is $ 50,000.

Please prepare a journal entry for the deposit received.

On 01 August, ABC receive a $ 1,000 deposit from the customer. It will be classified as the customer deposit which is the liability as the company has not yet delivered the car to customer.

The journal entry is debiting cash $ 10,000 and credit customer deposit $ 10,000.

After a month, ABC delivers the car to the customer. SO it is time to record sales revenue and reverses customer deposits.

The journal entry is debiting customer deposit $ 10,000, accounts receivable $ 40,000 and credit sales revenue $ 50,000.