What it means
In everyday trading, a deposit is a part payment made when an order is placed, with the balance falling due on delivery or completion. It serves two purposes at once: it funds the supplier's upfront costs and it commits the customer, since people rarely walk away from money already paid.
Accounting treatment catches many owners out. A customer deposit is not revenue when received, because nothing has been delivered yet, so it is recorded as cash on one side and deferred revenue or customer deposits, a liability, on the other.
In banking the word runs the other way. When you deposit money with a bank it becomes the bank's liability and your asset, which is why bank statements can look upside down to anyone reading them from the bank's perspective.
Deposits also appear as security rather than part payment, such as a rental damage deposit or a utility bond. These are refundable in principle and should be held separately in the accounts, because spending a refundable deposit as though it were income creates a real obligation with no cash behind it.
The commercial nuance is that a deposit shifts risk from supplier to customer, so its size is usually negotiated rather than fixed. Larger deposits are common on bespoke work with high upfront material costs, while standard stock items often need no deposit at all.
In practice
Real-world examples.
Example
A wedding venue takes a $2,500 non-refundable deposit eighteen months before each event, with the $9,500 balance due four weeks before the date. The deposits fund staff and maintenance through the quiet winter months, but the finance manager keeps them in deferred revenue until each wedding actually takes place.
Example
A commercial landlord holds a deposit equal to three months' rent, $27,000, in a separate account for the length of a lease. Because it is refundable, it never appears in the landlord's profit figures, and only the portion retained for repairs at the end is recognised as income.
Example
A small manufacturer switches from full payment on delivery to a 25% deposit with order after a customer cancelled a $60,000 bespoke build halfway through. The $15,000 deposit would have covered the specialised steel already cut for that job.
Formula
Calculation
Deposit amount = deposit percentage x contract value. Balance due = contract value - deposit amount.
A commercial kitchen fitting company wins a $48,000 refurbishment contract with a 30% deposit on signing.
Deposit amount = 0.30 x $48,000 = $14,400. Balance due on completion = $48,000 - $14,400 = $33,600.
The fitter must buy $19,000 of appliances and materials before work starts. Since the deposit covers $14,400 of that, the business still needs to fund $19,000 - $14,400 = $4,600 from its own cash for roughly six weeks. Raising the deposit to 40% would give $19,200 on signing and remove that funding gap entirely.Case study
Seen in the real world.
This is an illustrative and entirely fictional story. Crestline Joinery, a fictional maker of made-to-order staircases, ran for years with no deposit policy and financed every job from its overdraft. Two cancellations in one quarter, on jobs where the timber had already been ordered, left it $31,000 out of pocket and close to breaching its bank facility.
The owner introduced a 35% deposit on all bespoke orders and a 50% deposit on anything using imported hardwood. Only one customer in the following year refused the terms, and the overdraft balance fell steadily as deposits started funding materials instead of borrowings.
The illustrative point is that the deposit was not really a pricing change at all, but a working capital and risk decision that happened to be settled at the moment of sale.
Watch out
Common mistakes.
- Recording customer deposits as revenue on receipt, which overstates profit, inflates the tax bill and hides a real obligation to deliver.
- Spending refundable security deposits as working capital, leaving no cash available when the customer or tenant becomes entitled to the money back.
- Setting one deposit percentage for every job regardless of upfront material cost, so bespoke work is underfunded while simple stock orders are made harder to win than they need to be.
Questions
People also ask.
Is a deposit the same as a down payment?
In practice the terms overlap, though "down payment" usually describes a part payment on a purchase price while "deposit" more often implies money held to secure a commitment.
Should deposits be refundable?
That depends on what they are for: a deposit covering costs already incurred is normally non-refundable if stated clearly in the contract, while a security deposit is refundable by its nature.
How do deposits affect cash flow forecasts?
They pull cash forward to the order date rather than the delivery date, which usually improves the forecast, but the corresponding delivery obligation still has to be funded later.
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