Is a Customer Deposit Income? What Deposits Actually Do to Your Books

A customer commissions a $6,400 piece in November and pays a 50% deposit. You spend $2,700 on materials in December. The piece is delivered in February, and the remaining $3,200 lands then. Somewhere in the middle of that sits a year end, and the question of what the $3,200 deposit was doing in the meantime.

The distinction is not academic. Booking that $3,200 as income in November makes your 2026 books show $500 of profit on an unfinished order, and your 2027 books show a 100% margin on the same job. Neither figure describes what happened, and neither can be used to price the next commission.

Why it feels like income anyway

The money is in your account. It is spendable. It arrived because you sold something, and it will not be handed back in the overwhelming majority of cases. Every instinct says revenue.

The instinct is wrong in one specific way, and that way costs money. A deposit is cash you hold against work you have not finished. Until the piece is delivered, you are holding someone else's money in exchange for a promise. That distinction is the whole subject of why a healthy bank balance is not profit, and the accounting treatment is where the distinction gets written down.

What a deposit is on paper

In double-entry terms, receiving a deposit does two things at once. Cash goes up, and a liability goes up by the same amount. The liability account is usually called customer deposits, deferred revenue or unearned revenue, and all three names describe the same thing.

Nothing touches the profit and loss statement at that moment. That is not a technicality — it is the system correctly reporting that you have not earned anything yet. You have taken on an obligation and received cash to fund it.

This is also why the liability line is worth looking at. It is the only place in your books that says how much unfinished work you owe. For a workshop with four commissions running, that figure is a better description of the month ahead than any revenue number.

When it turns into revenue

Revenue is recognised when you have done what the customer paid for. For a made-to-order seller that is normally delivery or handover of the finished piece.

Both major frameworks say this in the same shape. The US standard, ASC 606, and the international one, IFRS 15, recognise revenue when the performance obligation is satisfied. Long production times do not change the principle; they just stretch the gap between the cash and the revenue, which is exactly why made-to-order businesses trip over it more than retailers do.

A shop selling from stock has a gap of seconds between payment and delivery, so the distinction never surfaces. A shop building to order has a gap of weeks or months, and often a year end sitting inside it.

The year-end example, in full

Take the commission from the opening. Price $6,400, deposit $3,200 paid in November 2026, materials $2,700 bought in December 2026, delivery and final $3,200 in February 2027.

Book the deposit as income and 2026 shows $3,200 of revenue against $2,700 of cost: a $500 profit on an unfinished order. Then 2027 shows $3,200 of revenue with no cost against it at all, because the materials were expensed the year before. Hold the deposit as a liability instead and 2026 shows nothing for this order, while 2027 shows $6,400 of revenue, $2,700 of cost and $3,700 of profit — which is what the order actually earned.

The same order, two treatments

What the wrong treatment does to your margins

Look at the bottom row. The same order reports a 15.6% margin in one year and a 100% margin in the next, or a single honest 57.8%. Only one of those numbers can be used to price the next commission.

This is how a workshop ends up believing its best month was the one where three deposits landed and nothing shipped. Costs and revenue drift into different periods, and every per-order figure becomes noise. Closing the gap between the quote and the real cost is impossible while the two sides are landing in different years.

Cash basis, accrual basis, and your tax bill

Everything above describes accrual accounting, which is what most management reporting uses. Tax reporting is a separate question, and the answer depends on the basis you file on and where you file.

A business reporting on an accrual basis generally does not owe tax on an undelivered deposit, because it is not yet revenue. A business reporting on a cash basis often counts cash received in the period it arrived, deposit or not. That is a genuine difference in outcome on a November deposit for a February delivery, and it is the single question worth taking to your accountant this week.

Sales tax and VAT are a separate question again

Whether a deposit triggers a tax point at the moment of payment is decided locally, and jurisdictions genuinely disagree. In some, a prepayment against an identified supply creates a tax point immediately. In others, nothing happens until the goods change hands.

The practical consequence is small but sharp: it determines what your deposit request has to look like, and whether it needs to be an invoice rather than a payment link. Get this checked once, set your templates up accordingly, and you never think about it again.

How to record it without making it a project

The mechanics are simple in any general ledger, including Xero, QuickBooks and Wave. The deposit is posted to a liability account rather than to sales. When the piece is delivered, you raise the invoice for the full price and apply the held deposit against it.

That single step clears the liability and books the whole $6,400 in the period it belongs to. The work is not hard. What is hard is remembering to do it for every order, months later, when the piece finally leaves the workshop.

Refunds are the other reason this matters

A liability is a claim someone else has on your cash. Treating deposits as spendable income makes refunds feel like losses rather than repayments, and it means the money is usually gone by the time the question comes up.

Sellers who keep the distinction visible handle a cancellation as an administrative event instead of a crisis. What you owe back, and what you have genuinely earned by then, comes down to your written terms — the same terms that decide what happens when a customer cancels after paying a deposit.

How much of your balance is actually yours

There is one number worth knowing at all times, and it is not in your P&L. Take the bank balance and subtract the deposits held against orders you have not delivered.

A workshop holding $18,400 with $11,900 of undelivered deposits has 64.7% of its bank balance already spoken for. Of the $6,500 left, $4,200 is committed to materials on those same orders, leaving $2,300 that is genuinely free. That number decides whether you can take on a machine payment, and it looks nothing like the balance on the app.

Work it out once and the effect is immediate. Most sellers who do this for the first time discover their free cash is a fraction of what they assumed, which is uncomfortable for an afternoon and useful for years.

Where accounting software stops

A ledger will hold the liability correctly once you tell it to. What it will not do is tie the deposit to the order, track the balance still owed on that order, or tell you which pieces in your workshop are funded and which are not.

That is a different shape of problem, and it is why Xero and QuickBooks fall short for made-to-order sellers. The accounting is downstream. The order is the thing you actually run the business on.

The practical split is straightforward. Your ledger answers what the business earned last quarter. An order view answers whether the piece in the corner of the workshop has been paid for. It also answers how much of the money you hold goes back if it never gets built.

What to do this week

• Check where deposits are being posted. If they land in a sales account, they are inflating this period and emptying the next one.
• Ask your accountant one question. Which basis you file on, and what that means for deposits held across the year end.
• Confirm the sales tax treatment once. Then build it into your deposit request template and stop thinking about it.
• Write down the coverage number. Bank balance minus undelivered deposits, updated when an order is delivered.

None of that requires new software or a bookkeeping project. It requires one account posted correctly, one conversation, and one number you keep looking at.

The bottom line

A deposit is cash you hold and revenue you have not earned. Recorded as a liability, it keeps the cost and the income of an order in the same period, keeps your margins meaningful, and keeps refunds from becoming emergencies. Recorded as income, it moves profit into the wrong year and reports margins you cannot price from.

For most made-to-order sellers this is a fifteen-minute fix that changes what every later number means. The order in the example earned $3,700, and it earned it in February. Everything else is a description of when the cash happened to move.

The bank balance is a fact about today. Revenue is a fact about delivery, and on made-to-order work those two dates are months apart.

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