How do I record income from partial or staged invoices?

Understanding partial and staged invoices

Partial or staged invoices are a common way to bill customers when work is delivered over time, when a project has multiple milestones, or when the final price depends on progress. Instead of sending one invoice at the end, you raise several invoices across the life of the job. You might invoice 30% upfront, 40% at a midpoint, and 30% on completion. Or you might invoice monthly based on work completed to date. Or you might invoice in “stages” such as discovery, design, build, testing, and launch.

The core accounting question is simple to state but easy to muddle in practice: when should you recognize the income in your books? For most businesses, “recording income” isn’t just about when you issue the invoice or when cash arrives; it’s about matching revenue to the period in which you actually earn it, using a consistent method.

This article walks through the practical ways to record income from partial or staged invoices, how the correct approach depends on your accounting method, and how to handle the most common pitfalls: deposits, retainers, milestone billing, change orders, credit notes, and situations where invoices don’t match progress. The goal is not only accuracy, but also clarity—so your profit reports, tax returns, and cash flow forecasts all tell a coherent story.

Start with the two big frameworks: cash basis vs accrual basis

Before you decide how to record income from staged invoices, you need to know which accounting basis you are using. Many day-to-day bookkeeping decisions flow from this single choice.

Cash basis: income is recorded when cash is received

Under cash basis accounting, you record income when you actually receive payment, not when you send an invoice and not necessarily when you do the work. Partial invoices and staged invoices are straightforward here: every time you receive money (whether it relates to stage 1, 2, or 3), you record that receipt as income.

Cash basis is simple and can align with tax rules for smaller businesses in some jurisdictions. However, it can distort your performance reporting if a project spans months: you might do lots of work in March and April, but record most of the income in May when the client finally pays. If you’re mainly looking for an easy way to track cash and stay compliant where cash basis is allowed, it can be acceptable. If you want management reports that match work performed to revenue earned, you’ll usually prefer accrual accounting.

Accrual basis: income is recorded when it is earned

Under accrual accounting, you record income when it is earned, which is generally when you deliver goods or services, regardless of when you invoice or get paid. Staged invoices can be used as a billing schedule, but revenue recognition must still follow what has been delivered.

Accrual accounting uses two key balance sheet accounts to bridge the timing gap:

Accounts receivable (A/R) represents what customers owe you for invoices you’ve issued but haven’t been paid yet.

Deferred revenue (also called unearned income) represents money you’ve received for work you have not yet performed. This is common with deposits, upfront stage payments, and retainers.

Accrual basis is slightly more complex to manage, but it yields financial statements that are more useful for decision-making, borrowing, investor reporting, and understanding profitability per period.

What “partial” can mean in real life

People use “partial” and “staged” in several different ways. You’ll record income differently depending on what the invoice actually represents.

1) Milestone invoices

Milestone billing means you charge a fixed amount when a defined milestone is reached (for example, “Design approved,” “Prototype delivered,” “Installation complete”). The amounts might be set in the contract and may not always match the exact percentage of work completed at that point. Milestone billing is common in agencies, construction, software development, and professional services.

2) Progress invoices (percentage-of-completion)

Progress billing means you invoice based on the proportion of work completed to date. For example, you might invoice 20% of the total contract value after completing 20% of the work. This is intended to line up billing with earning, but it requires a consistent method for measuring progress.

3) Split delivery invoices

Sometimes an invoice is partial because the customer orders multiple deliverables and you invoice each deliverable as it ships or completes. Here the invoice is partial in the sense that it covers only part of the full order, but each invoice typically corresponds to goods delivered or services performed.

4) Deposits and retainers billed as an invoice

Some businesses issue an “invoice” for a deposit or retainer before any work begins. That invoice may look like any other invoice, but from an accounting standpoint it often represents unearned income at the moment the customer pays. Confusing “invoice issued” with “revenue earned” is a common source of errors.

Cash basis recording for staged invoices

If you use cash basis accounting, the process is simple to describe: record income when you receive money. That does not mean you have to ignore the invoice. You still track invoices for customer communication and collections, but the accounting entry that affects profit is tied to the bank transaction.

Example: 3-stage invoice on cash basis

You sign a £10,000 project and bill in three stages: £3,000 upfront, £4,000 at midpoint, £3,000 at completion.

When you receive the £3,000 deposit, you record £3,000 as income. When you receive the £4,000, you record £4,000 as income. When you receive the final £3,000, you record £3,000 as income.

Cash basis reports can look “lumpy.” If the customer pays late or early, your income shifts accordingly. If you are comfortable with that, cash basis can be adequate. If you need income to align with performance, you may still use cash basis for tax but maintain accrual-style management reporting internally (some businesses do this with separate reports).

Accrual basis recording for staged invoices

Under accrual accounting, invoices and payments are events that affect your balance sheet (A/R and deferred revenue), while revenue recognition is tied to delivery. The simplest way to stay accurate is to separate the acts of:

1) issuing an invoice,

2) receiving payment, and

3) recognizing revenue.

Not every business does all three steps as separate entries in day-to-day bookkeeping because many accounting systems automate some of it. But conceptually, that separation helps you choose the right treatment.

Case A: Your staged invoice matches what has been delivered

If each staged invoice is sent only when that stage is actually complete (and the stage represents a deliverable you’ve earned), then you can often recognize revenue when you issue the invoice because the work has been performed at the same time. In that case, the invoice is effectively evidence that revenue is earned.

For example, you complete stage 1 and send an invoice for that stage. Under accrual accounting, the invoice increases revenue and increases accounts receivable. When the customer pays, you reduce accounts receivable and increase cash. In many small-to-medium businesses, this is the most practical method because it aligns billing with delivery.

Case B: You invoice ahead of delivery (common with deposits and upfront stages)

If you invoice in advance of doing the work—especially for an upfront stage payment—then the invoice is not automatically revenue. You may still issue the invoice and record it, but the income should sit in deferred revenue until the work is performed.

This is a critical distinction. An invoice can create a legal obligation for the customer to pay, but it does not necessarily mean you have earned the income yet. Under accrual accounting, being paid and being entitled to payment are not the same as earning.

Case C: You deliver ahead of invoicing

Sometimes you do the work first and invoice later. Under accrual accounting, you may need to recognize revenue before the invoice is sent, using an accrual or “unbilled revenue” entry. This is more common in larger organizations or where reporting deadlines require accurate monthly cutoffs. Many smaller businesses accept minor timing differences if invoicing follows quickly, but if the gap is significant, it can materially distort month-end reporting.

Choosing a revenue recognition approach for staged work

For staged projects, accrual accounting typically uses one of two approaches to recognize revenue:

Milestone-based recognition (recognize revenue when a milestone is achieved and accepted), or

Progress-based recognition (recognize revenue over time as work is performed, often using a percentage-of-completion method).

Which is best depends on the nature of your work and what your contract promises. If the customer benefits as you perform the work (for example, a service delivered over time), progress-based recognition often makes sense. If the value transfers at discrete points (for example, delivery of a module that the customer cannot use until complete), milestone-based recognition may be more appropriate.

For bookkeeping purposes, you want an approach you can apply consistently, with documentation that supports your estimates and timing. The more judgment involved, the more important consistency becomes.

How to record staged invoices under accrual accounting: the mechanics

Even if your software hides the journal entries, it helps to understand what is happening behind the scenes. Below are common patterns.

Pattern 1: Invoice equals earned revenue at the time of invoicing

This is the simplest scenario: you only invoice when the stage is complete and revenue is earned.

When you issue the stage invoice:

Debit Accounts Receivable (A/R)

Credit Revenue

When the customer pays:

Debit Cash/Bank

Credit Accounts Receivable (A/R)

In this pattern, there is no deferred revenue because you are not billing ahead of performance.

Pattern 2: You invoice or receive payment before the work is performed

This pattern covers deposits, retainers, and upfront stage payments where you have not earned the revenue at the time of billing or payment.

When you invoice in advance (optional step in some systems):

Debit Accounts Receivable (A/R)

Credit Deferred Revenue (Unearned Income)

When the customer pays:

Debit Cash/Bank

Credit Accounts Receivable (A/R)

As you perform the work and earn the revenue:

Debit Deferred Revenue

Credit Revenue

In many accounting systems, you can record the payment directly to a liability account (deferred revenue) if you don’t want the invoice to hit revenue immediately. The key is that the money is not treated as income until the corresponding work is done.

Pattern 3: You earn revenue before you invoice (unbilled revenue)

If you have performed work but have not invoiced it by the reporting date, you may need to accrue revenue.

At month-end (accrual):

Debit Unbilled Revenue (or Contract Asset / Work in Progress)

Credit Revenue

When you issue the invoice later:

Debit Accounts Receivable

Credit Unbilled Revenue

When paid:

Debit Cash/Bank

Credit Accounts Receivable

This pattern helps your revenue reflect work performed during the period, even if invoicing happens later.

Practical examples with numbers

Let’s walk through realistic examples that show how staged invoices interact with revenue.

Example 1: Deposit invoice with later delivery

You sell a £12,000 implementation project delivered over three months. You invoice a £4,000 deposit upfront, then £4,000 after month one, and £4,000 at completion. The deposit is required to book the project; no work has started yet.

Accrual approach: When the deposit is paid, record it as deferred revenue, not revenue. At the end of month one, if you have delivered one-third of the project, you recognize £4,000 of revenue. If the second invoice corresponds to work delivered in month one, it can be recorded as revenue at the time of invoicing (or it can also flow through deferred revenue; both can be made to work so long as the net effect is correct).

The most important rule is that the total revenue recognized in each month should reflect the work performed that month, not the payment schedule.

Example 2: Milestone invoice amounts don’t match progress

You have a £50,000 contract with milestones:

• £20,000 at design approval

• £20,000 at system build complete

• £10,000 at final acceptance

Suppose design approval occurs at the end of month one, but internally you estimate that month one represents only 25% of the total effort and cost. If you recognize £20,000 revenue in month one just because you invoiced it, you may overstate profit early and understate later periods.

In this scenario, progress-based revenue recognition may be better. You could recognize revenue over time based on costs incurred, labor hours, or another consistent measure. That means in month one you might recognize 25% of £50,000 = £12,500 as revenue, even though you invoiced £20,000. The extra £7,500 would sit in deferred revenue until you earn it in later months. This is one of the clearest examples of why separating billing from revenue matters.

Example 3: Progress billing with monthly invoices

You have a £100,000 construction project. Each month, the site manager certifies completion percentage. At the end of month two, completion is certified at 30% and you invoice £30,000 less any prior invoices. Here, the invoice is explicitly linked to completion percentage, so revenue recognition often aligns naturally with the certified progress.

However, you still need to be careful if certification lags behind actual work performed, or if the customer disputes part of the certification. You might use certification as your best evidence of progress, but your internal accounting should reflect the most reliable measure available.

How to handle deposits, retainers, and “advance” invoices correctly

Deposits and retainers are where many businesses accidentally misstate income. The word “deposit” is used loosely, and tax or legal treatment can vary by jurisdiction, but from an accounting standpoint, the key question is: have you earned it yet?

Non-refundable deposits

Businesses sometimes assume a non-refundable deposit is immediate revenue. But non-refundable in contract terms does not always mean it is earned right away. If the deposit is really an advance payment for future work, you may still treat it as deferred revenue until you perform that work. In some cases, part of a deposit may relate to an administrative setup fee that is earned immediately, while the rest relates to future delivery. If you can clearly justify that split, you can recognize the earned portion right away and defer the rest.

Retainers for availability

A “retainer” can mean different things:

• A prepayment for future services (defer it and recognize as you work), or

• A fee for being available (recognize over the period of availability), or

• A minimum monthly commitment that covers a defined package of services (recognize as delivered; may be ratable if the services are evenly delivered across the month).

The correct treatment depends on what the customer is actually buying: hours, outcomes, or availability.

How to record partial invoices when there are change orders

Projects rarely stay perfectly within their initial scope. Change orders (or variations) can increase or decrease the total contract value, shift milestone amounts, or introduce new deliverables. The accounting challenge is to keep your revenue recognition aligned with the updated reality.

Best practice: treat the contract value as a living baseline

If you recognize revenue over time, your percentage-of-completion calculations should use the latest approved contract value and the latest total cost estimate. That means when a change order is agreed, you update the contract total and re-evaluate how much revenue should have been recognized to date. The difference between the revised “revenue to date” and what you’ve already recognized becomes an adjustment in the current period.

If you recognize revenue on milestones, you may update the milestone schedule and ensure revenue is recognized when each revised milestone is achieved.

Invoicing vs revenue for change orders

Sometimes you bill a change order immediately (for example, “additional feature: £5,000 due now”) even though the extra work will be done later. In accrual accounting, that invoice may create deferred revenue until you actually deliver the additional feature. Alternatively, you may do the additional work first and bill it afterward, which may require unbilled revenue at month-end if the timing gap is significant.

What if your invoice stages don’t match your internal milestones?

It is common for billing stages to be negotiated around client preferences rather than operational reality. A client might want fewer invoices, or they might insist on a big holdback until the end. Your internal team, however, might hit many milestones along the way.

When billing stages do not match work stages, the solution is to decouple billing from revenue recognition:

• Use the invoice to record A/R (or cash) and a balance sheet offset (deferred revenue if billed ahead, unbilled revenue if earned ahead).

• Use a monthly process to recognize revenue in line with progress, supported by internal records (time tracking, project status reports, delivered units, cost-to-complete estimates).

This keeps your financials stable and prevents the “profit rollercoaster” that happens when revenue is recognized only at invoice points that don’t reflect actual earning.

Handling discounts, credit notes, and partial refunds

Partial invoicing often comes with mid-project adjustments: goodwill discounts, disputed items, or corrections. How you record these depends on what they relate to.

Discounts given on a staged invoice

If you apply a discount on a particular stage invoice because the customer negotiated a lower price for that stage, you generally record less revenue for that stage (assuming the discount relates to that deliverable). If you instead give a discount because of an issue earlier in the project, you may need to treat it as a reduction of revenue in the period when the issue is acknowledged, not necessarily the period of the original invoice. The practical approach is to record the credit note when issued and ensure your revenue recognition remains consistent with the updated contract value.

Credit notes for overbilling

If you issued a stage invoice but later determine you billed more than you earned or agreed, issuing a credit note reduces accounts receivable and reduces revenue (or reduces deferred revenue if the original invoice was deferred). The key is to reverse the same “bucket” you originally used. If you used deferred revenue for an upfront invoice, the credit note should reduce deferred revenue rather than hitting current revenue in a way that creates mismatches.

Refunds of deposits

When you refund a deposit that was recorded as deferred revenue, the refund reduces cash and reduces deferred revenue. It should not normally go through revenue, because it was never earned. If you previously recognized some of the deposit as revenue (because you performed some work), and then you refund part of it, the refund may reduce revenue to the extent it relates to work that will no longer be delivered. This is why good documentation matters: you want a clear link between money received, work performed, and amounts earned.

Common bookkeeping workflows in accounting software

Different accounting platforms implement staged invoicing differently, but most follow a similar logic. Here are common workflows you can adapt to your system.

Workflow 1: Use products/services mapped to revenue and deferred revenue

Some systems allow you to map certain invoice line items to a deferred revenue liability instead of revenue. For example, “Project deposit” could post to deferred revenue, while “Stage 1 delivery” posts to revenue. This makes the invoice itself a clean driver of correct accounting, as long as you use the right items consistently.

Workflow 2: Post all invoices to revenue, then adjust with month-end deferrals

Some businesses keep invoicing simple and let invoices hit revenue, then make a month-end journal entry to move unearned portions to deferred revenue. This can work if you have a reliable month-end routine and you reconcile deferred revenue carefully. It’s also common when invoice formats are constrained, or when operational teams issue invoices without accounting review.

Workflow 3: Track project progress and recognize revenue monthly

For long-running projects, you may recognize revenue monthly based on progress regardless of invoicing. Invoices and receipts then become balance sheet movements (A/R and deferred revenue/unbilled revenue). This workflow requires discipline but yields the most accurate monthly reporting.

Choosing a method to measure progress

If you recognize revenue over time, you need a method to measure progress. The “best” method is the one that most faithfully represents how you earn revenue and that you can apply consistently.

Cost-to-cost method

This method measures progress based on costs incurred relative to total expected costs. If you’ve incurred £30,000 of expected £100,000 total costs, you are 30% complete. It’s widely used in construction and project-based work where costs correlate to performance. It requires good cost tracking and reliable estimates to complete.

Labor hours method

Progress is measured by labor hours incurred relative to total expected hours. This can work well for service projects and agencies, assuming hours reflect effort and value.

Units delivered or milestones achieved

Progress can be measured by units delivered (for example, number of reports, modules, installations) or by achieving milestones. This is often clearer for clients and easier to verify, but it may not reflect effort evenly. If one unit is much harder than another, you may need weighted units or carefully defined milestones.

Why your progress measure must be documented

Staged invoices invite scrutiny because they create timing differences. If you are ever asked why revenue increased in one month and not another, you want to point to a consistent method and supporting records. Even if you are not subject to formal audits, good documentation helps you explain results to partners, lenders, or your future self when you revisit a project months later.

Managing accounts receivable for staged invoices

With staged invoicing, accounts receivable can become more complex because a customer may be part-paid across multiple invoices, may withhold a percentage, or may dispute a specific stage. Clean A/R practices reduce confusion.

Apply payments to the correct invoice (or stage)

Always apply payments to the specific invoice they relate to, even if you also track a customer-level balance. This makes it easier to see which stage is outstanding and follow up with the right context. It also helps when you need to issue a credit note for a particular stage.

Handle retainage or holdbacks explicitly

In industries like construction, a customer may hold back a portion (retainage) until final completion or a defects period. From an invoicing standpoint, you might invoice the full amount and show retainage separately, or you might invoice net of retainage depending on contract norms. From an accounting standpoint, you need clarity on what is billed, what is collectible, and what is conditional. If collectability is uncertain or contingent, revenue recognition may require additional caution. Operationally, track retainage amounts so they don’t vanish into “miscellaneous outstanding balances.”

Don’t confuse “unpaid invoice” with “unearned revenue”

An unpaid invoice is an A/R issue. Unearned revenue is a deferred revenue issue. They are different problems:

• A/R means you have earned revenue and are waiting for the customer to pay.

• Deferred revenue means you have been paid (or billed) but have not yet earned the revenue.

A staged invoicing setup can involve both at different times. For example, you might bill in advance (creating deferred revenue) but the customer pays late (creating A/R) while the work is still unperformed. Clear account structure prevents confusion.

Tax considerations and why they can differ from your books

Many businesses discover that “what my accounts show” and “what I’m taxed on” can differ, especially when deposits and staged invoices are involved. Tax rules vary widely and can depend on your business type, jurisdiction, and the accounting basis you are allowed or required to use for tax filings.

From a practical standpoint, keep these principles in mind:

• Your bookkeeping method should be consistent and defensible.

• If your tax basis differs from your accounting basis, you may need year-end adjustments or separate reporting schedules.

• Deposits and retainers are often treated differently depending on whether they are refundable, whether they are earned on receipt, and whether you provide ongoing services.

If you are unsure, it is worth getting professional tax advice tailored to your situation. Even if you keep your management accounts on accrual, you might have to report taxes on a different basis depending on local rules.

Month-end close checklist for staged invoice revenue

If you handle staged invoices regularly, a simple month-end routine will prevent most errors. Here is a practical checklist you can follow.

1) Review projects in progress

List all active projects that span multiple months. For each, identify the contract value, stage billing plan, and current progress.

2) Compare revenue recognized to progress

If you use milestone recognition, confirm which milestones were achieved during the month and whether acceptance occurred. If you use progress-based recognition, calculate the percentage complete using your chosen method and compute revenue that should be recognized to date.

3) Calculate deferred revenue and unbilled revenue adjustments

For projects billed ahead of progress, ensure the unearned portion sits in deferred revenue. For projects progressed ahead of billing, accrue unbilled revenue if material.

4) Reconcile deferred revenue balances

Deferred revenue should be supported by a schedule showing which customers and projects it relates to, how much is outstanding, and when you expect to earn it.

5) Review A/R for stage disputes and collection risk

Identify old or disputed stage invoices. If collection is doubtful, consider whether you need an allowance for expected credit losses (depending on the reporting framework you follow) or whether revenue recognition should be constrained until collectability is probable. Even without formal allowances, you should at least flag risks so your profit reports are not overly optimistic.

6) Update estimates to complete

If you use cost-to-cost or hours-based progress measures, update your estimate of total cost or total hours. This is essential; outdated estimates can cause systematic over- or under-recognition of revenue.

7) Capture change orders and scope adjustments

Ensure approved change orders are reflected in the contract value and the billing plan. Ensure unapproved scope creep is either billed or treated as a cost issue that reduces margin.

Common pitfalls and how to avoid them

Staged invoices introduce predictable failure modes. Knowing them upfront helps you design controls that keep your books clean.

Pitfall 1: Recognizing all staged invoices as revenue immediately

If you bill ahead, this inflates income early and can create painful corrections later. The fix is to use deferred revenue for unearned amounts and recognize revenue as delivery occurs.

Pitfall 2: Treating deposits as revenue just because they are called an “invoice”

Words on an invoice don’t decide the accounting. The fix is to look at what the payment is for: future work or delivered work. If future, defer it.

Pitfall 3: Not tracking revenue recognition at the project level

If you only look at the general ledger totals, you can miss project-specific overbilling or underbilling. The fix is to maintain a simple project schedule: contract value, billed to date, cash received, revenue recognized, deferred/unbilled balances.

Pitfall 4: Ignoring change orders until the end

When change orders pile up, invoicing and revenue can diverge dramatically. The fix is to update the contract value and estimates as changes are approved, not months later.

Pitfall 5: Mixing up A/R problems with revenue problems

Late-paying customers reduce cash but not necessarily revenue under accrual. Unearned revenue affects profit, not just cash. The fix is to use separate accounts and review both A/R aging and deferred revenue schedules.

Pitfall 6: Overcomplicating the system and then not maintaining it

A perfect method that no one follows is worse than a simple method applied consistently. The fix is to choose the simplest approach that meets your reporting needs, then document it and bake it into your routine.

How to decide what’s right for your business

The “right” way to record income from partial or staged invoices depends on your goals and constraints:

• If you want simplicity and your jurisdiction allows it, cash basis can work—record income when cash is received.

• If you want accurate monthly performance reporting, accrual accounting is usually better—recognize revenue when earned, use deferred revenue for upfront billing, and use unbilled revenue when delivery precedes invoicing.

• If you have long-running projects with uneven billing schedules, consider a progress-based recognition method supported by project tracking.

• If your stages match delivered milestones closely, milestone-based recognition can be clean and intuitive.

Regardless of method, consistency is your friend. Choose an approach, apply it the same way across projects, and keep supporting records that explain why revenue was recognized when it was.

A simple template you can apply immediately

If you want a straightforward process without reinventing your bookkeeping, try this pragmatic template:

1) Decide your accounting basis (cash or accrual).

2) For each staged invoice, label whether it represents earned delivery or advance billing.

3) If earned delivery: record as revenue (accrual) or as income when paid (cash basis).

4) If advance billing: record to deferred revenue when paid (and optionally when invoiced), then recognize revenue monthly as work is performed.

5) Keep a per-project schedule showing total contract value, billed to date, cash received, revenue recognized to date, and the difference (deferred or unbilled).

6) Update the schedule for change orders and revised estimates.

7) Reconcile the schedule to your ledger monthly.

This approach scales from a freelancer with a handful of projects to a growing business with dozens of concurrent jobs, and it keeps your financial reports aligned with reality.

Final thoughts

Partial and staged invoices are a billing tool, not a revenue recognition rule. Recording income correctly means deciding whether you’re on cash or accrual accounting, then ensuring your income reflects what you have actually earned—not just what you have billed or collected. For some businesses, that’s as simple as recording income when payments land in the bank. For others, especially those with longer projects and front-loaded billing, it means using deferred revenue and recognizing income over time.

If you build a consistent method—milestone-based or progress-based—supported by a simple project schedule, you’ll get clearer profit reporting, fewer surprises at month-end, and a much easier time explaining your numbers to anyone who asks.