How do I handle customer deposits in my construction books?
Customer deposits aren’t revenue when you receive them. They’re liabilities. You haven’t done the work yet, so you haven’t earned the money. This distinction matters for your books and for your taxes.
When a homeowner gives you $5,000 upfront for a bathroom remodel, that money goes into a liability account, not income. Call it “Customer Deposits” or “Unearned Revenue” on your chart of accounts. It sits there until you actually perform the work.
As you complete work and bill for it, you recognize revenue and reduce the deposit liability. If the customer paid $5,000 upfront on a $20,000 job, you apply that deposit against your invoices as the work progresses. The liability goes down, your revenue goes up, and your books reflect what you’ve actually earned.
The mistake most construction contractors make is recording deposits directly as income. This overstates your revenue and your profit before you’ve done anything. If you take deposits in December for work happening in January, you’re paying taxes on income you haven’t earned in a year when you didn’t do the work. That’s not just bad accounting. It costs you money.
Set up a current liability account in QuickBooks for customer deposits. When you receive a deposit, create a sales receipt or journal entry crediting that liability account. When you invoice the customer, apply the deposit as a payment against the invoice. The software handles the movement from liability to revenue automatically if you set it up correctly.
Track deposits by customer or by job. On a busy job board, you need to know exactly which deposits belong to which projects. If you’ve got five active jobs and four pending deposits in your liability account, you should be able to identify which customer each one belongs to. Use sub-accounts, memo fields, or your job costing system to keep this organized.
Progress billing complicates things slightly. If you bill 30% at rough-in and the customer’s deposit covers more than that first invoice, you carry the remaining deposit forward. If it covers less, the customer owes the difference. Match payments to invoices carefully so your receivables stay accurate.
This matters beyond just clean books. Bonding companies look at your financials when setting your bonding capacity. Banks look at them when you apply for lines of credit. Messy books with inflated revenue and understated liabilities make you look less creditworthy, not more.
If your books already have deposits mixed in with revenue, a bookkeeper near Gentry can help straighten things out. Going forward, setting up the liability account and using it consistently takes maybe an extra minute per deposit. That minute saves hours of confusion and potentially thousands in overpaid taxes.
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