A deposit is money received in advance. It secures a booking, funds initial costs, or demonstrates the client’s commitment before you start. Depending on what was agreed it may be refundable, partly refundable, or non-refundable.
The key accounting point is that receiving it does not mean earning it. Under accrual accounting a deposit is a liability — you owe the client either the work or their money back — and it converts to revenue only as you deliver.
Why It Matters
Two traps sit here. The first is recognising deposits as revenue on arrival, which overstates income and can pull tax into the wrong period. The second is tax point rules: in several VAT and GST systems, receiving a payment can itself trigger the tax point, meaning tax falls due when the deposit lands rather than when the job finishes. Where that applies, an informal "please send 50%" is not enough — the request needs to be a proper tax document.
Example
A £6,000 project takes a £2,000 deposit. On accrual books that £2,000 sits as a liability until work begins, then is recognised as it is earned. The final invoice shows the full £6,000 with the £2,000 deposit deducted, so the total billed across the job remains correct.
Frequently Asked Questions
Should a deposit have its own invoice?
Usually yes, particularly where receiving payment creates a tax point. A deposit invoice documents the request properly and gives the client something their own system can process.
Is a deposit refundable?
Whatever you agreed in writing before taking it. Non-refundable deposits are common but can be challenged if they look disproportionate to any real loss — describe what the deposit covers rather than simply labelling it non-refundable.