QuickBooks Desktop Users Misrecord Upfront Deposits as Income
QuickBooks Desktop users who book retainers as income overstate revenue; the accepted fix routes deposits through a liability account until invoiced.
QuickBooks Desktop users who take money up front keep hitting the same wall. The deposit clears the bank, the books call it income, and revenue runs ahead of the work actually delivered. An accepted answer on the vendor’s community pages, credited to Intuit, settles the matter with a liability-account workflow that carries each deposit until the job is billed. We walked it end to end, including the invoice step that shorter summaries tend to skip.
Is a customer deposit income?
No, and that is the root of the problem. A deposit or retainer is cash you hold while owing the customer either work or a refund. Accounting treats it as a liability, money that belongs to someone else until it is earned. The pattern surfaces across trades that bill up front: renovation contractors, designers, repair services.
Desktop will not stop you from booking it as income. Nothing on the receipt form asks where the obligation sits, because the software records whatever account the item points to. That constraint is why the accepted fix begins in the chart of accounts rather than on a sales form.
Set up the holding account and its item
The first move is a new other current liability account for deposits, opened at zero unless you are carrying forward balances you already hold. Next comes an item: a service item for retainers on labour, or an other charge item when the money covers goods. Link that item to the liability account, since the link is the whole trick. Every time the item lands on a transaction, the amount sits in the holding account instead of income. Build it once and it serves every job that follows.
Record the money when it arrives
When a customer pays a deposit, enter a sales receipt for that customer and put the deposit item on it for the amount received. Fill in the payment method and date as you would on any receipt; the item does the accounting. The receipt either pays straight into the bank or parks the money with your undeposited funds until you batch them. Either way the entry does two things at once. The bank balance rises, the liability rises by the same amount, and revenue stays untouched.
Apply the deposit to the final invoice
This is the step users lose sleep over, so we will spell it out. Invoice the customer for the full value of the finished work. On that same invoice, add the deposit item again and enter the deposit as a negative amount.
The negative line pulls the money out of the liability account and credits it against what the customer owes. The invoice total drops to the unpaid balance, the work itself finally books as income, and the holding account returns to zero. Skip the negative line and the customer is billed twice for the same money. Enter it with the wrong sign and the liability grows instead of clearing.
If the job is cancelled
Cancelled work clears the liability a different way. To refund in full, write a cheque to the customer and charge it to the deposit account rather than to an expense. Bank and liability fall together, and no revenue is ever recognized.
If your terms let you keep part of the deposit, bill the customer for the retained portion. Apply the deposit against that invoice with the same negative-line method, then refund the rest. The holding account should finish at zero either way.
The mistakes that recur
The failure points are consistent. Some users point the deposit item at an income account and see nothing wrong until year-end reports look inflated. Others build the item correctly but forget the negative line at invoicing, then chase the double billing through statements and credits. A few leave finished jobs sitting in the liability account for months. Every failure traces to one of two links: the item to the account, or the invoice to the deposit.
None of this is a bug. The program is doing exactly what its setup told it to do, which is why the setup deserves the attention.
Setup is cheap here: one account, one item, and the routine pays for itself on the first job. After that it never changes. Take the receipt, hold the liability, bill the work, apply the negative line, and finish at zero.