Handling a Down Payment on a Job
This article assumes you wish to receive a down payment on a sold job, deposit the money, and you do not wish to recognize the money as income until later.
- Create an item called “Customer Down Payment”. Put “Customer Down Payment” in the item’s description field. Use the Item Type “Service”. Leave the Rate field blank for now since it will vary by customer. You will change the Rate on each invoice. In the item’s Income Account field, click Add New. Add a chart of account using the “Other Current Liability” type. Enter a description of “Customer Down Payments”. Click Save & Close.
- Create an invoice for the customer. Add your new item. In the Amount field, enter the amount of the down payment. All this invoice will be doing is acting as a placeholder for which the down payment is received. The new service item will offset the income with a liability.
- On the invoice, click the button Menu > Receive Payment. Create a Receive Payment for the deposit as you would any other customer payment.
- Applying the Down Payment – When the job has been finished, we will finally generate an invoice for the job. At the end of the invoice input the Customer Down Payment line item and enter the total of all down payments from this customer as a negative number. This will now $0 the Customers Down Payments in the liability account and properly show the income as billed from the invoice.
Why go through all this trouble? Why not just receive the payments for the customer and leave them as an open balance to be applied later? If you take a down payment on a job you’ve now thrown your accounts receivable in the other direction, it’ll be a negative balance.
Instead, if we setup a liability account it will properly reflect and give you a much cleaner understanding with what your liabilities are as a business (down payments that you owe for services yet to be fulfilled) and your accounts receivable will reflect as a positive number to show the total amount owed to the business for services that have been completed.
Explanation of the Liability Account: When we setup the Customer Down Payments account as an Other Current Liability we told Total Office Manager that this is money owed for work that has yet to be completed. It’s a liability for our company because they haven’t completed the work and the customer has full expectations to receive a final product that won’t be delivered until the job is complete. When the final invoice is generated, we’ll back the payment out of the liability account as a payment against the final invoice because the final product has been delivered to the customer.