How do I record income if customers pay deposits and balances later?

Understanding the core question: what counts as “income” and when?

If your customers pay a deposit upfront and the balance later, it can feel intuitive to record money as income the moment it hits your bank account. After all, cash came in and you can see it on your statement. But accounting doesn’t always treat “cash received” the same as “income earned.” The key idea is that income is generally recorded when it is earned (when you’ve provided the goods or services you promised), not simply when you’ve been paid.

Deposits create a timing puzzle because a deposit is often not payment for something you’ve already delivered. It’s usually money you hold because you’ve promised to deliver something in the future. That promise matters. In many cases, a deposit is a liability at the moment you receive it—an obligation to provide goods/services later or return the money if you don’t perform. The balance payment later is also part of the same overall transaction, and depending on the accounting method you use, you may recognize income when you deliver, when you invoice, when the customer is billed, or when you receive cash.

So the practical question becomes: when you receive a deposit now and the remaining balance later, how should you record both parts so your books (and possibly your tax reporting) accurately reflect your business activity? The answer depends on three big factors: (1) your accounting method (cash basis vs accrual basis), (2) what you sell (services, products, rentals, events, subscriptions, construction, etc.), and (3) the terms of the deposit (refundable vs non-refundable, what it secures, and when it converts into earned revenue).

Start with definitions: deposit, retainer, prepayment, and “deferred revenue”

People use the word “deposit” to mean several slightly different things. Clearing up the vocabulary can save you from misclassifying the money and creating confusing reports later.

Deposit (common usage): An upfront amount a customer pays to reserve a date, secure inventory, start a project, or demonstrate commitment. It is often applied toward the final price.

Prepayment: Money a customer pays before you provide the goods or services. A deposit is usually a type of prepayment.

Retainer: Often used for professional services. A retainer may be (a) an advance against future services (unearned until you do the work), or (b) a fee paid to keep you available (which may be earned over time or immediately depending on terms). Not all retainers are deposits, and not all deposits are retainers.

Deferred revenue (or unearned revenue): This is the accounting label commonly used when you receive customer money before you’ve earned it. It appears as a liability because you “owe” the customer the product/service or a refund if you don’t deliver as agreed.

In everyday bookkeeping terms, if a deposit is intended to be part of the final sale price and you haven’t delivered yet, it often belongs in a “Customer Deposits” or “Deferred Revenue” account, not in “Sales” or “Income” right away—especially under accrual accounting.

Cash basis vs accrual basis: the first fork in the road

Before you decide how to record deposits and later balances, you need to know which accounting basis you’re using. Many small businesses use cash basis for simplicity, while others use accrual basis for better matching of revenue and expenses to the period they relate to. Your choice affects not only your financial statements but also, in many jurisdictions, how taxable income is calculated (though tax rules can have special provisions even when your books are accrual).

How to record deposits and later balances on the cash basis

Under cash basis accounting, income is generally recorded when you receive the cash, and expenses are recorded when you pay them. That means deposits are typically recorded as income when received, and the later balance is recorded as income when received. This is straightforward: money in equals income in the period it arrives.

However, “typically” does a lot of work here. Even on cash basis, some businesses prefer to track deposits separately for management clarity (so they can see what’s actually earned vs what’s owed). Also, depending on your reporting needs, you might want your internal financial statements to reflect performance more accurately than pure cash flow. For example, if you receive a large number of deposits in December for work you’ll deliver in January, cash basis will show a strong December and a weaker January, even though the work happened in January.

So on cash basis, you have two common approaches:

Approach A (simple cash basis): Record deposits as income when received; record the balance as income when received. This is simplest and matches cash-based tax treatment in many cases.

Approach B (cash basis for tax, but track deposits as liabilities internally): You still pay attention to cash for taxes if applicable, but in your bookkeeping system you might route deposits to a liability account and only recognize income when the job is delivered. This is a hybrid approach, used for better operational reporting, but you must be consistent and understand that your tax reporting might still follow cash rules (or specific tax rules that override your internal presentation).

If you choose Approach B, you’ll create an adjusting entry at the time you deliver the goods/services to move the deposit from liability to income. That gives you accrual-like revenue recognition while still operating with cash receipts and payments.

How to record deposits and later balances on the accrual basis

Under accrual basis accounting, you recognize income when you earn it—usually when you deliver the goods, complete the service, or satisfy the performance obligation promised to the customer. Cash receipts (like deposits) are not automatically income. They can be liabilities until you perform.

On accrual basis, the usual treatment looks like this:

When you receive the deposit: Debit Cash (increase cash), Credit Deferred Revenue/Customer Deposits (increase liability).

When you deliver the goods/services (or a portion of them): Debit Deferred Revenue/Customer Deposits (reduce liability), Credit Sales/Revenue (recognize income earned). If you invoice or are owed additional amounts, you may also Debit Accounts Receivable and Credit Sales/Revenue for the balance due.

When you receive the balance payment later: Debit Cash, Credit Accounts Receivable (if you invoiced and recorded A/R). If you didn’t use A/R and the customer paid immediately at completion, you could record the cash receipt directly against the revenue at that time, but many accrual systems still prefer recording the invoice and then the payment.

The biggest benefit of accrual treatment is that your revenue lines up with the period when the work happens, making your profit and loss statement more meaningful. The deposit sits on the balance sheet as an obligation until you deliver. That provides a clear picture: “We’ve collected money, but we still owe performance.”

Step-by-step bookkeeping examples (services, common scenario)

Let’s say you are a photographer who charges £2,000 for a wedding package. The customer pays a £500 deposit today to reserve the date, and the remaining £1,500 is due after the event, payable within 7 days. Here are practical workflows.

Example 1: cash basis (simple)

Deposit received (today): Record £500 as income.

Wedding completed (event day): No entry required just for completion if you aren’t tracking accruals.

Balance received (later): Record £1,500 as income.

Your income for the year depends on when the customer pays, not when you shoot the wedding. If the deposit and balance are in different accounting periods, your revenue is split across those periods.

Example 2: accrual basis (typical)

Deposit received (today): Record £500 to “Customer Deposits” (liability).

Wedding completed (event day): Recognize the full £2,000 as revenue earned. You will reclassify the £500 deposit from liability to revenue and record the remaining £1,500 as accounts receivable if not yet paid.

Balance received (later): Reduce accounts receivable by £1,500 when cash arrives.

This approach makes the profit and loss statement reflect the wedding revenue when you actually performed the service.

Step-by-step bookkeeping examples (products with deposits)

Deposits are also common with products, especially when items are custom-made, pre-ordered, or reserved. Suppose you sell a custom table for £3,000. The customer pays £1,000 deposit to start the build and £2,000 on delivery.

Cash basis outcome

You record £1,000 income when received and £2,000 income when the final payment arrives. If the table is delivered in a later period, the income may land earlier than the cost of materials or labor, creating swings in reported profit.

Accrual basis outcome

At deposit receipt, you record a liability (unearned). When you deliver the table (and transfer control to the customer), you recognize the full £3,000 as revenue and clear the deposit liability. If the customer pays the remaining £2,000 at delivery, you may have no accounts receivable at all, because cash comes in at the same moment you recognize the remaining revenue.

Partial delivery and staged work: deposits aren’t always “all or nothing”

Some businesses deliver value over time, not all at once. Think of construction, large design projects, software implementation, long-term coaching, or manufacturing with milestones. In these cases, you might earn revenue gradually, even if cash arrives upfront.

If you are on accrual basis, you’ll usually recognize revenue as you satisfy the obligations. That might mean:

Milestone-based recognition: You earn revenue when specific milestones are met (e.g., “design approved,” “foundation completed,” “beta delivered”).

Time-based recognition: You earn revenue evenly or proportionally over the period you provide service (e.g., monthly retainer services).

Percentage-of-completion concepts: Common in long projects, where revenue is tied to progress measures (hours incurred, costs incurred, units delivered). The details depend on your standards and the nature of your contracts.

In these situations, the deposit may sit as deferred revenue at first, then be recognized gradually as work progresses. The later “balance” payments may come in at various points. Your bookkeeping should match the underlying reality: cash is simply funding, but revenue reflects performance.

Refundable vs non-refundable deposits: why terms matter

Whether a deposit is refundable changes the economic substance. A refundable deposit is plainly money you might have to give back if you don’t deliver or if the customer cancels under eligible conditions. That strongly suggests liability treatment until the conditions are satisfied.

Non-refundable deposits are trickier. Many businesses assume “non-refundable” means “income immediately.” But even if a deposit is non-refundable, it may still be tied to future performance (for example, it will be applied against the final bill). In that case, you may still treat it as deferred revenue until you deliver, because it is still part of the payment for the eventual goods/services. The non-refundable aspect may only determine what happens on cancellation, not when the work is earned.

In some arrangements, a non-refundable deposit may be more like a cancellation fee or reservation fee—payment for holding capacity, turning away other customers, or blocking a date. If the contract clearly states that the deposit is earned upon receipt in exchange for reserving availability, some businesses recognize it as revenue immediately or over the reservation period, particularly under accrual accounting where the “performance obligation” could be the reservation itself. The correct treatment depends on what you promised and what the customer is actually buying with that deposit.

Because of this nuance, it’s helpful to decide what the deposit represents:

Deposit as part-payment for future delivery: Often deferred revenue until delivery.

Deposit as a separate fee for reserving capacity: May be earned on receipt or over time, depending on how the obligation is satisfied.

Deposit as a security deposit (damage/security): Often a liability that is not revenue at all, and may be returned.

Security deposits are not the same as customer deposits

A security deposit (common with rentals, equipment hire, or venues) is money held to cover potential damage or unpaid obligations. It is not typically revenue when received because it is expected to be returned, in whole or in part, assuming conditions are met.

Accounting-wise, security deposits usually sit in a liability account like “Security Deposits Held.” If some or all of the deposit is later retained (for example, due to damage or breach of terms), only then does the retained portion become income (or offsets expenses), depending on how your system handles it.

This distinction matters because mixing security deposits into sales revenue can inflate income and distort your margins. It can also make your bank reconciliation confusing when you refund deposits later.

Practical chart of accounts setup: keep deposits clean and visible

Regardless of whether you are cash basis or accrual basis, having a clean structure in your chart of accounts makes deposit handling far easier. Many businesses benefit from creating at least one dedicated liability account for deposits:

Liability accounts:

Customer Deposits (or Deposits Received)

Deferred Revenue (or Unearned Revenue)

Security Deposits Held (if applicable)

Income accounts:

Sales – Services

Sales – Products

Cancellation Fees (if you treat forfeited deposits as a distinct revenue type)

With this setup, you can run a balance sheet and immediately see how much deposit money you’re holding that still corresponds to work you haven’t delivered. That number can be critical for capacity planning and risk management: it’s a reminder that cash in the bank may not be “free” because it comes with obligations.

How to handle invoices and receipts: deposit invoice vs final invoice

Your documentation flow affects your bookkeeping flow. Many businesses use one of these patterns:

Pattern 1: separate deposit invoice and final invoice

You issue an invoice for the deposit (e.g., 25% upfront). When paid, it reduces the amount the customer owes in the future. Later, you issue a final invoice for the remaining balance.

In bookkeeping systems, the deposit invoice might post to a liability account (if accrual) or to income (if cash basis). The final invoice posts revenue (and accounts receivable if unpaid). When you apply the deposit against the final invoice, it reduces what is still due.

Pattern 2: single invoice with staged payments

You issue one invoice for the full amount and note payment terms: “£500 deposit due now, £1,500 due on completion.” When the deposit arrives, it posts as a partial payment on the invoice, reducing accounts receivable.

This can be easier operationally because you can see the full contract value in one place. Under accrual accounting, however, invoicing alone doesn’t necessarily mean you’ve earned the revenue; you still need to recognize revenue when you deliver, depending on your standards and system settings. Some systems will recognize revenue on invoicing by default, which could be inappropriate if you invoice early for future work. In that case, you may need to route invoicing to deferred revenue or use a workflow that separates billing from revenue recognition.

Pattern 3: receipt-first approach (common in small service businesses)

You take the deposit via card or bank transfer and issue a receipt rather than an invoice. Later, you issue an invoice for the remaining balance. This can work fine if your bookkeeping system properly treats the deposit as a liability until the job is complete (accrual) or as income upon receipt (cash basis). The main risk is losing track of which deposits belong to which jobs—so you need good customer/job references and consistent naming.

Applying the deposit to the final sale: avoid double-counting revenue

One of the most common mistakes is recording the deposit as income when received, and then also recording the full final invoice amount as income later without subtracting the deposit. That leads to overstated revenue.

Here’s what “double counting” looks like in practice:

You receive £500 deposit and record it as Sales.

Later you issue a £2,000 invoice and record it as Sales.

Now your books show £2,500 of sales for a £2,000 job.

To prevent this, you must ensure the deposit is either:

(a) recorded to a liability account initially and then reclassified to sales when the job is earned, or

(b) recorded to sales initially but then the final invoice records only the remaining balance (or the deposit is recorded as a negative line/credit that reduces the invoice revenue to the net amount).

Most modern bookkeeping systems handle this cleanly when deposits are applied as payments against invoices, but it’s still easy to get wrong if you manually journal entries without a consistent approach.

Cancellations, no-shows, and forfeited deposits

What happens if the customer cancels after paying a deposit? The accounting depends on your terms and what actually happens.

If you refund the deposit: You simply reduce cash and reduce the deposit liability (or reverse income if you recorded it as income on cash basis). If you charged a separate cancellation fee, that fee is income when earned per your terms.

If the deposit is forfeited: At some point, you no longer owe the customer a future service or refund. That is often the moment you recognize income. Under accrual accounting, you may reclassify the deposit from liability to an income account such as “Cancellation Fees” or “Other Income,” depending on your chart of accounts and how you want reporting to look.

If part of the deposit is retained and part refunded: The retained portion becomes income (or offsets costs) and the refunded portion reduces the liability and cash.

For operational clarity, many businesses treat forfeited deposits separately from ordinary sales revenue. This helps you understand your true sales performance and also keeps customer-friendly reporting tidy (for example, when you analyze revenue per service type).

Gift cards and vouchers: similar mechanics, different labeling

Gift cards and vouchers behave like deposits in one major sense: you receive cash before you deliver. In many accounting systems, gift card sales are recorded as a liability (deferred revenue) until the gift card is redeemed. The moment of redemption is when revenue is earned, because that’s when the goods/services are provided.

This matters if your business uses deposits that function like credits. For example, customers might prepay £200 and then use it later against sessions. That is essentially store credit and is often treated like deferred revenue until redeemed.

Sales tax or VAT considerations (conceptual, not jurisdiction-specific)

Deposits can create complications with consumption taxes like sales tax or VAT because the tax point may be based on invoice date, payment date, or delivery date depending on the rules in your region and the nature of what you sell. From a bookkeeping perspective, it’s important not to accidentally treat the entire deposit as tax-inclusive revenue without considering whether tax is due at that stage.

Practically, many businesses handle this by configuring their invoicing so the correct tax is calculated at the appropriate point—either on the deposit invoice, on the final invoice, or proportionally on both. The key is consistency and alignment between your invoicing documents and your accounting entries. If your system automatically posts taxes when invoices are issued or payments are received, make sure you understand how deposit invoices are treated so you don’t under- or over-report tax.

Revenue recognition mindset: think in “obligations” rather than “payments”

A helpful way to stop deposits from feeling confusing is to shift your mindset. Instead of asking “When do I have the money?” ask “When have I done the thing that the customer paid for?”

If you receive a deposit for a future service, you have money and you also have an obligation. Your books should show both sides of that reality. A liability account exists to represent that obligation. When you perform, the obligation reduces and revenue increases. This is why accrual accounting is often preferred for businesses with substantial deposits: it tells the story of what has been earned versus what is still owed.

Even if you use cash basis for taxes, using liability tracking for deposits can give you much better internal reporting. You can answer questions like:

How much money have we collected for jobs not yet completed?

How many bookings are secured for future months?

If we had to refund all outstanding deposits tomorrow, could we?

What portion of our bank balance is truly “available” versus tied to future delivery?

Common real-world scenarios and how to record them

Different industries use deposits differently. Here are practical ways to think about the most common scenarios.

Scenario A: event businesses (venues, DJs, caterers, planners)

Events are usually delivered on a specific date. Deposits are often paid months in advance. Under accrual accounting, deposits are typically deferred until the event occurs. On the event date (or once you’ve substantially performed), you recognize revenue for the full contract amount and clear the deposit liability. The later balance payment either reduces accounts receivable or is recorded as cash received at completion.

Scenario B: contractors and builders (progress payments)

Deposits may fund initial materials and scheduling. Revenue might be recognized over time as work is completed. Each payment (deposit or milestone payment) may go into deferred revenue first, then be recognized as revenue as progress is made. Alternatively, invoices might reflect progress and the revenue is recognized in line with that progress. The key is matching revenue recognition to actual progress rather than to when cash arrives.

Scenario C: professional services on retainer

If a client pays a monthly retainer in advance, that payment is usually unearned at receipt and becomes earned as you provide services across the month. A simple approach is to record the payment as deferred revenue, then recognize revenue weekly or monthly. If the retainer is for “availability” rather than specific hours, you may recognize it evenly over the coverage period, because that’s when you satisfy the obligation of being available.

Scenario D: manufacturing and custom orders

A deposit may be required to begin production. Under accrual basis, the deposit is deferred until the product is delivered or control transfers. If the customer cancels and you retain the deposit, that retained amount becomes income when you are released from the obligation to deliver or refund (and you should ensure that aligns with your contractual terms).

Scenario E: rentals and equipment hire with security deposits

The rental fee is revenue as the rental occurs. The security deposit is not revenue; it’s a liability that is returned if conditions are met. If damage occurs and you retain part of the deposit, that retained portion may be recorded as income or as a reduction of repair expense depending on how you track it. Keeping security deposits separate avoids inflating rental income.

How to keep your reports meaningful: deposits vs earned revenue

Even if your accounting method leads you to record deposits as income when received (as is common on cash basis), you may still want management reports that separate “cash collected” from “revenue earned.” Otherwise, deposit-heavy months can look like boom periods and delivery-heavy months can look like slumps.

To keep reports meaningful, consider these practices:

Use job/project tracking: Assign deposits to a customer and job so you can see outstanding work tied to those funds.

Run a customer deposit liability report (if using deferred revenue): This helps ensure you can reconcile deposit balances by customer and date.

Track fulfillment dates: Tag revenue recognition to completion dates so you can analyze performance by when work was delivered, not just when paid.

Separate forfeited deposits: Keep cancellation-related income in a distinct account so sales performance isn’t overstated.

Month-end process: reconciling deposit balances

If you collect deposits regularly, a simple month-end routine can prevent errors from piling up:

Review your “Customer Deposits” or “Deferred Revenue” balance and compare it to a list of open jobs/bookings.

Confirm that deposits for completed jobs have been moved to revenue (accrual) or properly applied against the final invoice (any basis).

Identify old deposits linked to jobs that were cancelled, refunded, or never scheduled, and resolve them—either by refunding, applying, or reclassifying according to your contract terms.

Check for negative or unusual balances by customer, which can indicate misapplied payments or duplicate entries.

This routine keeps your balance sheet honest and reduces the chance of awkward customer conversations when someone asks, “What’s the status of my deposit?”

What to do if you already recorded deposits as income (and want to fix it)

It’s common to start by recording deposits as income because it feels simplest, and then later realize you want a cleaner approach. Fixing it depends on your goals and whether you’re changing methods or just improving internal reporting.

If you want deposits treated as liabilities going forward: Create a “Customer Deposits” liability account and start posting new deposits there. For old deposits, you can decide whether to leave past periods as-is (to avoid restating old results) or to reclassify open deposits that relate to future jobs. If you reclassify, you may need a journal entry that moves the portion of deposits that remain unearned from income to the liability account, with careful attention to dates and job status.

If you accidentally double-counted revenue: Identify the invoices/jobs where both deposit income and full revenue were recorded. Then correct by either reducing revenue (credit note or adjusting entry) or reclassifying the deposit entry so the net revenue equals the actual contract value.

If you’re worried about taxes: Bookkeeping adjustments can affect taxable income depending on method and local rules. If your changes would materially change what you report for tax, it’s worth aligning your bookkeeping method with your tax reporting approach and keeping documentation for why entries were made.

Simple decision checklist: how should you record it?

When you’re unsure, use this checklist to choose a sensible approach:

1) Have you delivered the goods or services yet? If no, the deposit often belongs in a liability account (especially on accrual basis).

2) Is the deposit refundable? If refundable, it is very likely a liability until the relevant conditions are met.

3) Is the deposit part of the final price? If it will be applied to the final invoice, it usually should not become permanent “extra” income on receipt; it should reduce what the customer owes later or be recognized as part of total revenue when earned.

4) Is the deposit actually a separate reservation fee? If the deposit is clearly earned for reserving time/capacity, you may recognize it when that reservation service is provided (immediately or over the period), depending on your policy.

5) Do you need financial statements that reflect performance rather than cash timing? If yes, consider tracking deposits as deferred revenue even if you use cash basis for simplicity elsewhere.

Best practices for deposit and balance workflows

Once you pick an approach, consistency is your friend. Here are best practices that reduce mistakes and make reporting easier:

Write clear terms: Specify whether the deposit is refundable, when it becomes non-refundable, how it applies to the final price, and what happens on cancellation. Clear terms make the accounting treatment easier to justify and apply consistently.

Use consistent naming: Label transactions as “Deposit – [Customer] – [Event/Job Date]” so you can trace them quickly.

Apply deposits to invoices properly: If your system allows deposit application, use it rather than manual workarounds. This prevents revenue from being overstated.

Separate security deposits: Keep security deposits out of revenue entirely unless retained under specific conditions.

Review outstanding deposits regularly: Old deposits are where errors hide: cancelled jobs, rescheduled services, or deposits that were never applied.

Match revenue to delivery when possible: If you want meaningful monthly performance reporting, accrue revenue when you earn it and use deposits as deferred revenue until then.

Putting it all together

Recording income when customers pay deposits and balances later comes down to one fundamental question: are you recording based on cash movement or based on when you earn revenue?

On cash basis, the simplest method is to record income when cash arrives, meaning deposits are income upon receipt and balances are income when paid. This is easy and often aligns with cash-based tax reporting, but it can distort performance across months if deposits and deliveries fall in different periods.

On accrual basis, deposits are typically not income when received. Instead, they are recorded as a liability (deferred revenue or customer deposits) until you deliver the goods or services. When you perform, you recognize revenue and reduce the deposit liability, and you record the remaining amount as accounts receivable if it hasn’t been paid yet. When the balance arrives later, you reduce accounts receivable.

The details can change if the deposit is a security deposit, if it is a separate reservation fee, if the project is delivered over time, or if cancellation policies result in forfeited deposits. But the guiding principle remains the same: avoid double-counting, keep deposits traceable to jobs, and align revenue recognition with what you’ve actually delivered.

If you set up your accounts thoughtfully—especially by using a dedicated deposit liability account—you’ll be able to see at a glance how much money you’ve collected for work still owed, how much revenue you’ve actually earned, and how much remains to be billed or collected. That clarity helps you manage cash, plan capacity, and produce financial reports that tell the real story of your business.