Accounting for Non-refundable Deposits
Deposit is the amount of cash that supplier requires the customers to pay before receiving goods or services.
The supplier requires the customers to pay a deposit for a variety of reasons. If the customer purchases valuable goods from the oversea supplier, they will require to make some deposit. It helps to ensure that the customers really need to purchase the goods. It helps to prevent the customer from canceling the order while the supplier already places the order or even delivers the goods.
If the customers rent the property from the owner. They may require to deposit some amount of cash to secure the rental period. It prevents the customer from leaving the property and is not responsible for any damage.
There are two types of deposits that suppliers require the customers to pay. The first type is the refundable deposit, which the supplier has the obligation to pay back on a certain date. The second type is the non-refundable deposit which the supplier will not pay to customers. The deposit will be used to settle the goods or services.
The non-refundable deposit will be recorded on the current assets on the balance sheet. When the due date arrives, it will be reversed and settled with the customers. It will be net off with the accounts receivable that company has to collect from the customers.
On the other hand, the refundable deposit is also recorded as the assets on the balance sheet. and the supplier will have to give cash back to the customers on the due date. It sounds similar to the financial assets in which the issuer and holder settle the cash in the future. The company has to treat it as a financial liability which is a bit complicated compared to the non-refundable deposit.
Journal Entry for Non-refundable Deposit
When the company receives a non-refundable deposit from customers, they have to record it as the current assets on the balance sheet. The deposit supposes to be held by the company in a short term only, it will be reversed when the transaction is completed.
The journal entry is debiting cash received and credit customers’ deposits.
| Account | Debit | Credit |
|---|---|---|
| Cash | ### | |
| Customers Deposit | ### |
The transaction will increase the cash on balance sheet and increase the customers’ deposit which is the liability.
When the sale transaction is completed, the company will reverse the customer deposit. But instead of giving back the cash to customers, it will be used to reduce the accounts receivable.
The journal entry is debiting customers’ deposits, accounts receivable, and credit sale revenue.
| Account | Debit | Credit |
|---|---|---|
| Customer Deposit | ### | |
| Accounts Receivable | ### | |
| Sale Revenue | ### |
The customer’s deposit is reversed to zero, and it will net off with the accounts receivable. The company needs to collect the cash only the remaining portion.
Example
Company ABC sells the a customize machinery to the customer. Based on the customer’s specifications, ABC has to modify the machine. So it requires the customer to deposit 30% of the total purchase. The deposit is not refundable, it will be netted off with the invoice bill to the customers. The purchase price of the machine is $ 100,000. Please prepare the accounting record for the non-refundable deposit.
When the company receives the deposit from the customer, they have to record cash received. The journal entry is debiting cash $ 30,000 and credit customer deposit $ 30,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 30,000 | |
| Customer Deposit | 30,000 |
When the company delivers the machine to the customer, they will issue invoices and record revenue and accounts receivable. The journal entry is debiting customer deposits $ 30,000, accounts receivable $ 70,000, and credit sale revenue $ 100,000.
| Account | Debit | Credit |
|---|---|---|
| Customer Deposit | 30,000 | |
| Accounts Receivable | 70,000 | |
| Sale Revenue | 100,000 |
The transaction reverses the customer deposit from the balance sheet. But instead of paying cashback to the customer, it is used to net off with the accounts receivable. The company record accounts receivable of only $ 70,000 due to the deduction of $ 30,000 from the total purchase price.