Customer Deposits: Cash Before Revenue

A customer deposit can increase the bank balance before the business has earned revenue under the accrual assumptions used here. The cash comes with a delivery obligation or other terms that still need to be satisfied. Treating every advance receipt as freely available profit can hide the cost of completing the work and any possible refund obligation.

Follow a deposit through delivery

Consider a hypothetical $10,000 project with a 40% customer deposit, measured against the full contract price. The customer pays $4,000 in month one. The business pays $2,500 for preparatory materials that remain an asset until used. For this simplified example, no work has yet met the agreed revenue-recognition condition, so month-one recognized revenue is zero even though cash increases by $1,500.

In month two, the business completes the project, recognizes $10,000 of revenue under the stated example assumption, and collects the remaining $6,000. It uses the $2,500 of materials and incurs and pays another $3,500 of project costs. Total project cost is $6,000, so project profit before any other overhead is $4,000. Month-two net cash movement is $6,000 − $3,500 = $2,500.

The $4,000 deposit is not recognized again as additional revenue when the final $6,000 is collected. The total contract revenue remains $10,000. This distinction prevents a cash-first spreadsheet from overstating sales by counting the deposit and full invoice as separate sales.

Reserve capacity and completion costs

Maintain a deposit register with customer, contract, amount received, work still owed, expected completion costs, and any relevant refund terms. The register should reconcile to the accounting records, but it also serves an operational purpose: it shows which future work is supported by money already received and therefore will not create another receipt when performed.

If the business spends the deposit on unrelated work, the obligation to deliver remains. A cash forecast should include all remaining project payments even when the corresponding customer cash arrived in a prior month. Stress a delayed delivery or a refund using the actual contract conditions rather than assuming deposits are always nonrefundable.

Keep the accounting assumption visible

Actual revenue recognition can depend on the contract and the applicable accounting policy. This example assumes recognition at completion solely to explain timing; it does not establish a rule for every service or product. Use the treatment confirmed for your records, preserve the cash schedule separately, and avoid equating a rising deposit balance with rising profit.

Method references: SEC: Beginners’ Guide to Financial Statements. Accessed October 22, 2026. All dollar figures are hypothetical worked examples.