Recording a Deposit or Credit on an Invoice

Last Updated: Oct 09, 2015 01:06AM PDT

Learn how to enter a customer deposit (which is when a customer pays for a contract in advance), an invoice overpayment (which is when a customer overpays an invoice), and a customer credit (which are given if a customer returns an item or overpays an invoice).

Why record deposits and credits in a special way?

Any time you hold customer funds in trust for services that have not been performed or products that have not been delivered, it's considered a liability, since the income has not been earned yet. So, before the income is earned, you temporarily place the money into a Client Credit type account, like the Deposits from Customers account.

Likewise, if a customer has returned an item or overpaid for an invoice, this is also money that you're holding in trust for a customer, so it also needs to recorded as a liability. Credits can also be recorded using the Deposits from Customers account, since deposits and credits act in the exact same way.

When the income is earned, you apply the deposits or credits against the invoice, which moves the money from your client credit account (a liability) into your income account.

I don't have a Deposits from Customers Account

If you have removed your Deposits from Customers account (by default, your chart of accounts will have this account), then you can add it back by going to the Accounts page.

From there, use the Add New Account section to create the following account:

Here's some additional information about creating the account.

  1. Number: You can feel free to leave this field blank as a number will be auto-assigned (however, you can add your own number if you have a numbering system)
  2. Description: A description isn't necessary, but you can add a description like "Deposits received from customer in advance and/or credits given to customers".
  3. Type: Make sure to choose the Client Credit account type instead of a regular liability account, since this account type has special properties that allows you to apply funds within it as payments for invoices.

Recording a Customer Deposit/Credit/Overpayment

Deposit

Here's an example of how to record a payment that a customers makes in advance for a project (i.e. a deposit). First, go to the Income page.

Then go the Enter Payment tab.

You fill out the fields like you would for a customer payment for an invoice, so for the Payment Account, you choose the account you will deposit the funds into. However, instead of selecting an invoice to pay, for the Pre-payment, credit, and overpayment field, choose the Deposits from Customers account and enter the deposit amount.

In the above example, a $500 payment was deposited into the Bank Account.

Overpayment

Alternatively, if the customer overpaid for an invoice, an invoice to be paid is selected. Additionally for the Pre-payment, credit, and overpayment field, you choose the Deposits from Customers account and enter the overpayment amount.

Credit

Entering a credit is also very similar to entering a deposit.

The difference is that you would use an Income Account for the Payment Account. For example, if the invoice that you're issuing a credit for used the Sales Income account for the Income Account, then that's the account you would enter into the Payment Account field.

If you charged taxes on the invoice, you need to make sure that you create an additional payment credit for the tax charged. So, if the sales taxes charged was 5%, you'd enter an additional credit for $25.00 that credits the Sales Tax Payable account.

Note: The name of your Sales Tax Payable account will probably be different, since the account will start with whatever your tax name is called. So, if the name of your sales tax were called "State Tax", then your account would be named State Tax Payable.

Viewing Customer Deposits/Credits

To see the deposits/credits that a customer has, go to the Customers page and choose the customer.

On the right hand side of the customer's profile, you will be able to view the balances, which includes a section for Client Credits.

Applying Customer Deposits/Credits

Applying funds found in the Deposits from Customers account to an invoice is easy. All you need to do is go to the Income page and click on an existing invoice.

Then click on the Record Payment button.

This will pop up a payment window where you can follow these four steps:

  1. Click on Show Pre-Payments to see the customer credits
  2. Click on a checkbox to apply a credit
  3. Choose the Amount to apply
  4. Click on Add to finish

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