Year-end entries for customer deposits received
The entries a firm posts at year end so a client's customer deposits and upfront payments sit as contract liabilities, not as revenue.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A furniture maker takes half the price up front before building a dining set. A school collects the next term's fees in the last month of the year. A wedding venue banks a deposit for a function eight months away. A software reseller sells annual licences paid in advance. In every one of these businesses, the bank balance at year end includes money for work not yet done.
Small clients often post these receipts straight to sales, because that is what the bank line looks like. The year-end job for the firm is to find them, move what has not been earned out of revenue, and show it as what it is: an obligation to the customer.
Cash in, obligation still open
ACCA quotes IFRS 15's definition of a contract liability as an entity's obligation to transfer goods or services to a customer for which it has received consideration, or for which the amount is due, from the customer. ACCA's year-end adjustments article describes the same idea in older language: income received in advance, or deferred income, is a liability.
Investopedia explains the bookkeeping. When an advance payment is received, the business records it as cash, an asset, and at the same time as deferred revenue, a liability. It also notes that IFRS 15 and the US standard ASC 606 require businesses to record upfront payments as contract liabilities and convert them to revenue as they complete their obligations to customers. Investopedia's explanation of deferred revenue walks through those entries step by step.
The point for the client is simple. The deposit is not yet theirs to count as income. If the furniture maker went out of business before delivering the table, it would owe the money back.
Finding deposits booked straight to sales
Clients rarely label deposits clearly. Ways to find them:
- Order books and job lists. Any order open at year end with money already received is a candidate.
- Booking systems. Venues, guest houses, event organisers and training providers usually have a list of future bookings and deposits paid.
- Invoices issued before the work. Pro forma or deposit invoices dated before year end for jobs delivered after it.
- Fee schedules. Schools, crèches and clubs often bill or collect the next period's fees before year end.
- Subscriptions and service plans. Annual licences, maintenance plans and memberships paid in advance.
- Post-year-end deliveries. Goods dispatched in the first weeks of the new year: was any of the price received before year end?
For each item, record the customer, the amount received, what remains to be delivered and the expected delivery date.
The year-end entry and its reversal
A worked example in words. The furniture maker received a deposit for a dining set during the last month of the year and posted it to sales. The set will be delivered in the new year.
- At year end: reduce revenue by the deposit and record a contract liability for the same amount. Profit for the year falls; the balance sheet now shows the obligation.
- At the start of the new year: reverse the entry, putting the deposit back into revenue and clearing the liability, so that when the set is delivered and the balance is invoiced, the full price lands in the year of delivery.
If the client's system can record deposits against a customer's account as a liability from the start, encourage that. It removes the need for the adjustment and makes the year-end schedule a simple report.
Where the work is partly done at year end, only the unearned part stays as a liability. A builder who has completed a stage of a renovation has earned that part of the deposit; the rest is still owed in work.
Subscriptions released over time
Some payments are earned gradually rather than on delivery. Investopedia explains that for ongoing services such as subscriptions, part of the deferred revenue is moved into revenue each month as the service is delivered, reducing the deferred revenue balance.
For a client that sells annual service plans, the year-end question becomes: how many months of each plan remain after the year end? That unexpired part is the contract liability. Where there are many plans, a schedule by start date, with the months remaining at year end, is the cleanest evidence. A school's next-term fees work the same way, with the term as the unit.
Approving the entry in Achekam
In Achekam's Studio, staff can post the year-end adjusting entry that moves unearned deposits out of revenue into a contract liability. If the entry is found to be wrong, it is reversed with a record of who reversed it and why, never deleted, so the reviewer can see both the original and the correction.
Where the client's receipts come into Achekam as bank lines or documents, any journal proposed from them is only a candidate. A person approves and posts it, and AI is refused both steps. That review point is where a deposit can be coded to a liability account at the outset, rather than corrected at year end. Possible duplicates and low-confidence fields wait in the Intake Review Queue for a person, which helps when the same customer pays a deposit and then a balance.
Before the statements go to review
- Schedule of deposits and advance payments at year end, each with evidence.
- Confirmation that each item was undelivered, or partly delivered, at year end.
- Subscription and plan schedule showing the unexpired part.
- Year-end entry posted and the reversal planned for the new year.
- Contract liability presented separately from trade payables.
The relationship between these balances and their mirror image, work done but not yet billed, is covered in contract assets and liabilities, and adjusting entries at year end sets this entry among the rest. Ask each client that takes deposits for its open order list at year end; it is the shortest route to the right figure.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
