--- title: "Customer Deposits & Retainers: How to Record Them | MCC" description: "Book deposits as liabilities, apply them to invoices and handle refunds. Worked example on a $6,500 job." url: "https://mcc-solutionsnj.com/bookkeeping/guides/customer-deposits-and-retainers-in-the-books" --- Bookkeeping guide · Updated October 12, 2026 # Customer Deposits and Retainers: How to Book Them Taking money before work starts is smart for cash flow, but it is not income yet. Recording a deposit as a sale makes revenue look higher than reality and leaves a mess when the final invoice is sent. By [Matthew Coleman](/about), MCC Solutions **Quick answer.** A customer deposit is not income yet. You owe the customer the product, the service or their money back, so record it as a liability, customer deposits or unearned revenue, and move it to income only when you deliver. Want this handled for you? Monthly bookkeeping, cleanup and year-end close for small businesses. Start with a free health check of your books. [Free health check](/bookkeeping/health-check)[Get a quote](/bookkeeping/#interest) **Related:** [NJ 1099 contractor rule (ABC test)](/bookkeeping/guides/nj-independent-contractor-rule-abc-test-2026) · [Trial balance explained](/bookkeeping/guides/trial-balance-explained) · [Owner contribution or loan](/bookkeeping/guides/owner-equity-and-capital-contributions) **Free tools:** [Mileage deduction calculator](/bookkeeping/mileage-deduction-calculator) · [Current ratio calculator](/bookkeeping/current-ratio-calculator) [![Intuit ProAdvisor Gold tier badge](/img/credentials/intuit-proadvisor-gold.png)](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77)Gold tier in Intuit's ProAdvisor program. [See my Intuit listing](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77) Keeping your own books? Tallyfinch does invoices, bank import and reports on your computer. [See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software) ## Why a deposit is a liability When a customer pays a deposit, you owe them either the product or service, or their money back. That obligation is a liability, usually called customer deposits or unearned revenue. It becomes income only when you deliver or earn it. Cash-basis taxpayers may treat money received differently for tax. Your reports for management can still show deposits separately. Ask your CPA about your specific situation. ## Recording the deposit Create a liability account such as customer deposits. When money arrives, debit the bank and credit that liability, tagged with the customer name. In many programs you record a payment or credit memo on the customer, which creates the same effect. Do not create an invoice for the deposit amount and then another for the work unless your system handles the linking properly. ## Applying the deposit When the job is invoiced, issue the full invoice for the work. Then apply the deposit as a credit against it. Revenue is recognized for the whole amount, the liability is cleared, and the customer owes only the remaining balance. For progress billing, apply deposits at the stages stated in the contract. Spell out in the agreement whether the deposit is applied to the final invoice or to the first one. ## Refunds and cancellations If a customer cancels, check the contract for what is refundable. A refundable deposit is returned by debiting the liability and crediting the bank. A non-refundable one, if the contract allows, may be recognized as income when you keep it. The treatment depends on the terms and the law, so ask an attorney or CPA for wording and treatment. Document the reason, the date and the amount for each case. ## Reviewing the balance Run the liability account by customer every month. Each balance should match a live job or a planned delivery. Old balances with no activity need investigation: an unfinished job, a refund owed or a deposit applied to the wrong customer. Keep the cash from deposits in mind during planning. It belongs to the work not yet done, so spending it elsewhere can cause trouble when the work comes due. ## A simple example A photographer takes a deposit to hold a wedding date. The deposit goes to a customer deposits liability. On the wedding day the full invoice is created, the deposit is applied against it, and the client pays the rest. Income is recognized for the whole fee at the time the service is delivered, and the deposit liability is cleared. If the couple cancels, the contract decides whether any of the deposit is returned, and the entry follows the contract. ## Worked example with numbers A customer pays a $2,000 deposit on a $6,500 job. Record the deposit as a liability. When you invoice, apply the deposit: invoice $6,500, deposit applied $2,000, balance due $4,500. If the job is canceled and you refund $2,000, the liability returns to zero with no income. ## Mistakes that cost money Booking deposits as sales and paying tax on money not yet earned. Forgetting refunds. Not tracking deposits by customer. ## Check your work Review the deposits liability monthly. Each balance should map to a customer and a job. ## Common questions **Is a retainer the same as a deposit?** Similar. A retainer is often a prepayment for future services, drawn down as work is done. **Do I owe sales tax on a deposit?** Rules vary by state and product. Check with the state tax agency or your CPA. **Can I deposit retainers in my operating account?** Some professions require separate trust accounts. Check any rules that apply to you. This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation. Let us handle it [### Monthly bookkeeping Categorizing, reconciling and monthly reports, with cleanup, payroll and NJ filings available. Bookkeeping →](/bookkeeping/) [### QuickBooks Online Monthly bookkeeping, cleanup and reconciliation in QuickBooks Online for New Jersey small businesses. Your account stays in your name. QuickBooks →](/bookkeeping/software/quickbooks-online)[### FreshBooks Bookkeeping, invoice clean-up and reconciliation in FreshBooks for New Jersey freelancers and service businesses. 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