The Importance Of Deposits And How To Record Them
What are deposits?
A deposit is simply money held at a bank. You can think about is as an arrangement involving a transfer of money to another party for safekeeping. In a business context, it’s often used as an assurance or collateral for the delivery of a service or goods. A deposit can go either way, meaning you either charge or pay someone before the work starts to ensure the job will be done.
Why are deposits relevant?
The last thing you want to do is put your time into a project only to find out weeks later that your payment isn’t coming through, or that your client doesn’t require your service anymore. Setting a deposit set up beforehand can help you avoid this.
Here are some other scenarios a deposit is helpful:
It allows businesses to buy supplies before a job starts which helps ease cash flow.
A customer can show a business that they are serious about pursuing a project.
It gives business owners comfort that they will be paid for their services in the end – this is particularly applicable for service industries.
Landlords can collect security deposits to ensure that they are covered in case of any damage being done to their property.
Retainer vs. Deposit – What’s the difference?
In general, retainers and deposits are used interchangeably but tend to have different meanings.
Let’s break it down for you:
A retainer is usually non-refundable and is applied to your invoice. This is a common practice in professional services
You can view it as ‘securing’ a service for a specific time.
A deposit is normally refunded to you upon completion of services – like at the end of your house rental. Another case is if you put down money to hold an item for purchase that you don’t end up needing, you’ll be refunded the fee.
This can be seen as a payment toward the total fees. Essentially, you’re putting down a partial payment which is used for the total cost of the project.
Should you charge GST/HST?
GST/HST isn’t charged because a deposit is an amount held on hand towards a future service. However, you should charge GST/HST for a retainer.
How to record deposits
One quick and easy way to record deposits is on Quickbooks (QB). If you use Quickbooks already, great! If you don’t have a system set up, consider using something like QB to organize and record your deposits.
4 Easy Steps:
- Make an account to hold your deposit activity. Label the account type as Other Current Liabilities, the detail type as Current Liabilities, and the recommended name as Deposits Held. If you choose to use account numbers, they should be anywhere in the mid-2000s, such as 2500. Example:
- When putting the invoice together, create a new product or service to use. Next, label the type as Service and name as Deposit. The income amount is the Deposits Held created in step 1 and the sales tax field is set to the default option Out of Scope. Example:
- Using the newly created Deposit product, create an invoice for the desired deposit amount. Remember to add a brief description in the designated box to show what the deposit is for. Example:
- Once you’re ready to bill, prepare your invoice as normal. On the last line, add in the Deposit product and enter the amount of the deposit you want to apply to this specific invoice as a negative value. It doesn’t have to be the full amount of the original deposit, but remember how much you’ve used since nothing is stopping you from entering a higher number than the agreed upon-deposit. Example:
This should cover all you need to know about deposits and retainers. If you have any questions or need help setting your deposit activity up, please come and see us.