Definition of Customer Deposit
A customer deposit could be money that a company receives from a customer prior to the company earning it (by providing the customer with goods or services). In other words, the company receives the asset Cash and has an obligation to provide the goods or services to the customer or to return the money. Hence, the current liability account Customer Deposits is credited. When the company earns the deposit amount, the current liability will be debited and Sales Revenues will be credited.
A customer deposit could also refer to the money a bank receives from a depositor. Since the bank is not earning this money, the amount is recorded by the bank with a debit to Cash and a credit to Customer Deposits.
Example #1
Real-world Example of Customer Deposit
Let’s assume that Ace Manufacturing Inc. agrees to produce an expensive, custom-made machine for one of its customers. Ace requires that the customer pay $50,000 before Ace begins to design and construct the machine. The $50,000 payment is made in December 2023 and the machine must be finished by March 31, 2024. The $50,000 is a down payment toward the machine’s price of $400,000.
In December 2023 Ace will debit Cash for $50,000 and will credit Customer Deposits, a current liability account. When the machine is completed in 2024, Ace will debit Customer Deposits for $50,000 and will credit Sales Revenues for $50,000.
Example #1 Summary
Let’s break down the above customer deposit example step by step.
December 2023
Ace Manufacturing Inc. receives a $50,000 down payment from the customer.
January – March 2024
Ace designs and constructs the custom-made machine.
March 2024
Ace completes the custom-made machine by March 31, 2024, as agreed.
Practice Quiz for Customer Deposits
1. When a company receives a customer deposit, which account should be debited and which account should be credited?
A. Debit Customer Deposits, Credit Cash
B. Debit Cash, Credit Customer Deposits
C. Debit Sales Revenues, Credit Cash
D. Debit Cash, Credit Sales Revenues
2. When a company earns the customer deposit amount, which account should be debited and which account should be credited?
A. Debit Customer Deposits, Credit Cash
B. Debit Cash, Credit Customer Deposits
C. Debit Customer Deposits, Credit Sales Revenues
D. Debit Sales Revenues, Credit Customer Deposits
Answer Key
1. B
2. C
