Accounting for Down Payment Deposits
A. If you are doing milestone payments beyond the 50% down prior to completion you would do a progress billing (with invoice).
B. You complete the project and invoice with the expectation of payment prior to, at, or some period of time after delivery/pickup depending on the customer.
You should not be creating a true invoice until you ship or are ready to ship.
From contributor W:
The deposit goes under "retainers", which is a liability: the cash and liability to do work balance each other on your books. When the job is invoiced, apply the deposit by moving it from retainer to income (sales), the balance being due is in accounts receivable. Quickbooks is pretty good about explaining how to do this and itís very simple. We do it with every deposit we receive.
From contributor T:
Assume that this was a retail transaction and there was sales tax involved. The state wants to collect its money according to the month the sales tax is generated, not necessarily when the funds are moved from "retainer" to "income". How should you account for sales tax with Quickbooks?
From contributor R:
I don't know about contributor W, but we're calling it a down payment, not a sale, at that time. If something should go very wrong and the job isn't completed, then based on the specifics of the situation we would invoice for balance due with the down payment applied against it or issue a credit memo and check for some/all, again as the situation warrants.
From the original questioner:
It is exactly the sales tax reporting issue that has my britches all in bunch. We currently use sales receipts to record the deposit to a liability account and transfer the payments to an invoice when the job is ready to ship. The problem is Quickbooks records this as a sales tax event (even though we enter it as non sales tax situation) and thus totally screws up the sales tax report. This one of many reasons that we need to create an invoice at the time of the sale, which is when we receive an order. The other reason is that the contractor that we work with needs an invoice to make any payments. This is because we are a supplier not a sub contractor. Again when I go buy a custom lazy boy chair I pay full price on an invoice and then wait six weeks for my lazy boy chair. I am again challenging the concept that we are not receiving a "deposit" but a partial payment on goods to be shipped in six weeks.
From contributor R:
You can do this both ways in Quickbooks and still have accurate sales tax reporting.
1. Set up a progress invoice - top right corner of your invoice screen with the drop down menu. In the quantity field you will enter the percent of your 'deposit' for each line item. A sale will be created for only the amount of that invoice. Update quantity field for consecutive invoices through completion. This way you will pay sales tax incrementally based on your invoices.
2. As contributor W said - set up a liability account for 'retainers' or something to that effect. In your items list, set up a service item (non-taxable) that links to that account. When you invoice for a deposit (don't use sales receipt), use that non taxable item - you will have an invoice that is not recorded as a tax sale. At the end of the project create an invoice for the full amount, then use the same non-taxable item as before with a negative dollar amount to reflect the payments you have received (this moves the amount back out of the liability account). In this case your sales tax will all be recorded at the end of your project.
Note: on larger projects that may stretch out over a long period of time, I prefer method # 1, this way you pay your sales tax as you go - instead of having a large sales tax liability as you hit the end of the project.
If you were to work on a single project for letís say six months - using method # 2 - your P&L will show five months of no sales, then one really good month. This may or may not be a concern to you, depending on your volume and frequency of completed projects.
From contributor B:
Deposits are non-taxable items called 'Up-Front Deposits'. They are billed with a normal invoice so receivables reporting is accurate. Deposits of course are liabilities, not assets. Progress invoices are produced monthly and the deposit is added in a line, under the item 'Deposit Applied', where you enter in the amount paid already. Everything is accounted for this way.
We do monthly WIP estimates to keep our books in line if we're not billing on a project at the end of every month. So our P&L is accurate from month to month. The WIP amount is entered as a general journal entry at the end of the month, then a reverse entry of the same amount is entered at the beginning of the month.
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