Deposits in advance of work performed.

You just received a deposit in advance for a big project you were just hired to do! Congratulations! How should it be recorded in the books? In accordance with United States Generally Accepted Accounting Principles, deposits received in advance are accounted for as a liability called unearned revenue or deferred revenue because your business has received cash but has not yet provided the goods or services for which the customer paid. According to the accrual basis of accounting, revenue is recognized when it is earned, not when cash is received.

Initial Journal Entry

When a customer makes a deposit, you record the increase in your cash and the increase in your liability. This is because you now owe the customer a good or service.

Here's the initial journal entry for receiving the cash:

• Debit: Cash for the amount of the deposit. This increases your cash balance.

• Credit: Unearned Revenue for the same amount. This creates a liability on your balance sheet.

Example: A landscaping business receives a $500 deposit for a project to be completed next month.

Adjusting Journal Entry

After you've provided the goods or services and earned the revenue, you'll make an adjusting entry to reduce the liability and recognize the revenue.

Here's the adjusting journal entry:

• Debit: Unearned Revenue for the amount of the deposit that has been earned. This decreases the liability.

• Credit: Revenue for the same amount. This recognizes the revenue on your income statement.