Receiving money from a customer and earning it are not always the same thing. If a customer pays before you have supplied the goods or completed the work, those funds may need to remain on the balance sheet as a liability rather than flowing straight through to revenue. Getting this wrong — in either direction — can distort monthly profits, skew year-end figures, and create headaches when VAT is involved.

Customer deposits in accounts are more common than many businesses realise. Government-commissioned research found that 51% of UK businesses selling to consumers took deposits or advance payments, rising to 59% among small businesses. The revised FRS 102 rules, which apply to accounting periods beginning on or after 1 January 2026, make the timing of revenue recognition more explicit. This post sets out what that means for how you record and review advance payments.

A customer deposit means the business has received cash before completing everything it has agreed to provide. Consider a business that agrees to complete a project for £40,000. The customer pays a £12,000 deposit when the contract is signed. At that point, the business has £12,000 more cash, the customer has paid part of the agreed price, and most or all of the work still remains to be done.

If the business records the full £12,000 as revenue immediately, profit is recognised before the related work has been performed. That overstates earnings for the period and understates them for the period in which the work actually happens.

Under the revised FRS 102 rules, where payment is received before the business transfers the promised goods or services to the customer, the amount may need to be recognised as a contract liability until the relevant obligation is satisfied. The key question is what has actually been delivered at the point the cash arrives — not when the customer chose to pay.

Separating the date money is received from the date revenue is earned is the foundation of getting this right.

Where the business has received money but still owes goods or services to the customer, the payment sits on the balance sheet rather than immediately in the profit and loss account. At the point of receipt, with no work yet completed, the full amount remains as an advance or customer liability.

As the relevant goods or services are provided, the appropriate portion moves into revenue. Advance payments do not necessarily stay untouched until the entire contract is finished. If a customer pays £20,000 upfront against a £40,000 project, and by month-end the business has completed work that supports recognising £10,000 of revenue, the accounts would show cash received of £20,000, revenue recognised of £10,000, and a remaining contract liability of £10,000.

The calculation should follow what has actually been delivered, not simply divide the deposit by the number of months in the project.

Depending on the accounting framework and the nature of the transaction, you may see different terms used for the balance sheet entry:

• customer deposits
• deferred income
• income received in advance
• contract liabilities

The label matters less than being able to identify what the balance relates to and why it has not yet moved into revenue. Useful evidence includes contracts, milestones, timesheets, delivery records, customer approvals, project reports, and agreed rates. That documentation gives the management accounts a clearer basis for the revenue figure recognised in each period.

Deposits can make the bank balance look stronger before the related revenue belongs in the profit and loss account, and that creates a timing mismatch that matters.

Suppose a business receives a £30,000 customer deposit in December. The work does not begin until January. If the full £30,000 is recorded as December revenue, December shows too much revenue and profit, while January carries the costs of completing the work without the corresponding income. Neither period reflects what actually happened.

The same point applies at year-end. If a company receives several large deposits shortly before its accounting date, the accountant needs to establish how much of the related work had actually been completed by that date. A year-end customer deposit balance should be supported by details showing which customer paid it, which contract or order it relates to, how much work has been delivered, how much remains outstanding, and when the remaining work is expected to be completed.

Payment timing also varies significantly between businesses. The 2025 Longitudinal Small Business Survey found that 44% of SME employers gave customers trade credit, and 63% of those businesses considered late payment a problem. Whether customers pay before or after delivery, the accounting records need to reflect when the underlying goods or services were actually provided — the direction of the timing mismatch changes, but the principle stays the same.

VAT does not follow the same timing as accounting revenue, and for VAT-registered businesses this distinction is particularly important.

HMRC's position is that an advance payment or deposit forming part of the price for an identifiable supply will normally create a VAT tax point. The tax point is generally the earlier of the date the VAT invoice for the advance payment is issued or the date the payment is received. That means VAT can become due before the amount is recognised as revenue in the accounts.

To take a straightforward example: a business receives a £12,000 deposit before completing the work. For accounting purposes, some or all of that money may remain as a liability on the balance sheet. For VAT purposes, receipt of the payment may already have created a tax point requiring the VAT to be declared in the current return period.

The accounting and VAT treatment therefore need to be considered separately and both need to be tracked.

A genuinely refundable security deposit can be treated differently for VAT, so the fact that a payment is described as a deposit does not automatically mean it triggers a tax point. The nature of the payment matters. If you are uncertain whether a particular deposit creates a VAT obligation, it is worth reviewing the terms before you file.

Customer deposits should not be posted once and then left on the balance sheet indefinitely. A balance that made sense six months ago may now represent completed work, a cancelled order, or an amount that should have been refunded.

A regular review should cover whether the goods have now been supplied, whether the work has been completed, whether part of the deposit should now be recognised as revenue, whether the customer has cancelled, whether any amount is refundable, whether VAT has been accounted for correctly, and whether old balances still relate to live contracts.

As a practical example: if a £15,000 deposit has been sitting on the balance sheet for nine months, you should be able to identify the order it relates to and explain why it has not moved into revenue or been refunded. If nobody can explain the balance, it needs further investigation. The same applies where the work has already been completed but the deposit is still sitting within liabilities — that understates revenue and profit.

A clear customer deposit schedule makes the year-end review easier and reduces the risk of old balances being carried forward without explanation. It also makes it easier to spot where the VAT position and the accounting treatment have drifted apart.