There are a couple of ways to handle customer deposits in QuickBooks.
Method 1: Receive Payment Without Applying to an Invoice
If the customer hands you a check you, can simply receive the payment without applying it to an invoice. This will create a credit on their account. While this method will allow you to apply the credit to the project invoice, it usually isn’t the best way to handle the situation.
Method 2: Utilize Customer Deposit Liability Account
I prefer the customer deposit liability account method. The correct accounting treatment of a deposit is to treat it as a liability (you haven’t earned the revenue yet, so you’re just holding their money for now).
To use this method you’ll need to:
- Setup a current liability called Customer Deposits
- Setup an “Other Charge” item called Deposits that points to the “Customer Deposits” account you just setup.
If the customer hasn’t paid you yet, you can issue an invoice using the Deposits item (Result: Debit Accounts Receivable, Credit Customer Deposits). If the customer already paid you, you can issue a sales receipt to skip the receive payment step (result: Debit Cash, Credit Customer Deposits)
When the revenue is earned, generate another invoice. On the first line(s), you’ll use your normal item for billing your customers. This line will be for the full amount of earned revenue. On the next line, use the Deposits item. Enter the amount of the deposit as a negative (only up to the amount of the revenue being invoiced). (The Result: Debit Customer Deposits, Credit Revenue, Debit Accounts Receivable for the difference between the deposit paid and revenue earned).
You can always run a transaction detail report for the Customer Deposits account and total by Customer/Job to see what the remaining balance on hand is for each customer. Reconciling this account should become a part of your monthly close process.