How should I record customer deposits and payments received before work starts?

A customer paying before work starts improves cash, but does not necessarily mean the whole amount is earned revenue that day. Under accruals accounting, money received before the relevant goods or services are provided is often recorded as deferred income or another contract liability. Recognise revenue as the applicable accounting rules and contract require, which may be at a point in time or as work progresses. A genuine refundable security deposit may have a different purpose from an advance towards the price. Keep the contract, amount received and refund conditions together. If you use the cash basis for tax, the income timing can differ, so do not apply the accruals treatment automatically.

Use a consistent process so the deposit is applied to the final amount due and the sale is not counted twice. Track each customer’s balance and review deposits attached to delayed or cancelled jobs. An advance towards a taxable supply normally creates a VAT tax point for the relevant amount when paid or invoiced in advance; a genuine security deposit can be different. Cancellation does not automatically remove VAT, so check what was agreed and whether a refund or other adjustment is due. CASS can help set up the entries in Xero and reconcile the balances. Include the remaining delivery costs in the cash forecast before treating the deposit as spare cash.