Invoicing Refundable Customer Deposits to Liabilities

#1

We run a business where we rent out chairs. A customer is expected to concretise a booking by paying a deposit.
We normally invoice everything before the customer pays the deposit.

A couple of questions:

  1. How do i classify the invoice item “Breakage Deposit” to show under liabilities when I raise the invoice? When i go to “sales invoice items” under settings, and click on “Edit” next to the “Breakage Deposit” line item i have created, the drop down box labelled “Account” doesn’t show the “customer credits” account that is visible under “summary” and under “liabilities”.

  2. Once the goods are returned and i need to pay back the deposit, how would i do that so that my liability decreases and back decreases?

Currently i’m accounting for the “Breakage Deposit” as revenue and then i record the paying back of that deposit as an expense…its rather cumbersome.

Thanks.

#2

The breakage deposit should not be categorized as revenue, because you have undertaken no economic activity to earn it. Likewise, returning the deposit is not actually an expense. It is merely satisfying the liability. What I would do is:

  1. Create a liabilities account called Breakage Deposits.

  2. Create the new customer identity, if necessary.

  3. When you create a sales invoice, include a line for the deposit and allocate only that line to the Breakage Deposits account. Allocate other lines according to what type of sale they are.

  4. Using a journal entry, transfer the deposit to Customer credits for that customer. Debit Breakage Deposits and credit Customer credits.

  5. Under Bank Accounts, Receive Money against that invoice in Accounts Receivable. This can be done all at once, if the customer pays in full, or in stages.

  6. When the chairs are returned from rental, Spend Money from the bank account, allocating the expenditure to Customer credits and the appropriate customer.

Unfortunately, as you have observed, you cannot allocate a sales invoice line item directly to Customer credits. If you could, steps #1 and #2 above would not be necessary. I have raised this issue with @lubos before, but without response. This is the same situation as when a customer pays a deposit against upcoming delivery of goods or services, but requires a sales invoice in order to authorize payment. The small change of allowing allocation of sales invoice lines to Customer credits would greatly streamline the workflow.

An important consideration here is that Manager’s present restriction requires creation of a liabilities account that you expect to be zero. Much better to hold amounts owed to customers in their individual Customer credits subaccounts than to leave them lumped together in the temporary liabilities account where they are nameless.

#3