Customer deposits: liability or revenue

Under FRS 102 a deposit or payment in advance for goods or services not yet supplied is a contract liability, not revenue. It is released to revenue when the business delivers what was paid for. A deposit only becomes income without delivery when the contract ends and the business is entitled to keep the money with nothing left to supply.

Why is a customer deposit not revenue when it is received?

Revenue under the revised Section 23 of FRS 102 is recognised when, or as, the business satisfies a performance obligation by transferring goods or services to the customer. Receiving cash is not the trigger. Paragraph 23.125 says that if the business receives consideration, or the consideration is due, before it transfers the goods or services, it recognises a contract liability when the payment is made or falls due, whichever is earlier. A contract liability is defined as the obligation to transfer goods or services to a customer for which consideration has been received or is due. As the goods or services are transferred, the liability is derecognised and revenue is recognised.

So a wedding venue that takes a booking deposit in March for a September wedding, a builder that takes 25% before starting work, or a furniture maker paid upfront for a made to order table all hold the money as a liability until they perform. The fact that the customer has paid, and may even have signed terms saying the deposit is non refundable, does not mean the business has earned it.

The revised Section 23 applies to accounting periods beginning on or after 1 January 2026, with earlier application permitted if all the Periodic Review 2024 amendments are adopted together (paragraph 1.37). The model itself is explained in the five step revenue model in FRS 102.

Does it make a difference whether the deposit is refundable?

It changes what kind of liability the business holds, but not the conclusion that the money is not yet revenue. There are three common types.

• Non refundable part payment. The customer has paid in advance for the supply. This is a contract liability under paragraph 23.125. Paragraph 23.30 makes the same point about non refundable upfront fees: where the fee does not itself transfer a good or service, it is an advance payment for future goods or services and is recognised as revenue when those are provided.
• Refundable payment. Where the business expects to refund some or all of what it has received, paragraph 23.49 requires a refund liability for the amount it does not expect to be entitled to keep. That estimate is updated at each reporting date.
• Security deposit. Money held against the safe return of hired equipment, or similar, is not payment for a supply at all. It is a contractual obligation to hand cash back, which falls within the FRS 102 glossary definition of a financial liability. It never becomes revenue; if part is kept to cover damage, that amount is recognised as income or offset against the cost of repair when the business becomes entitled to it.

When does a forfeited deposit become income?

A deposit is forfeited when the customer pulls out and, under the contract, the business keeps the money. At that point the business no longer has an obligation to supply anything for it, so the contract liability no longer meets the definition of a liability and is released to profit or loss.

Timing is the key judgement. A customer who has gone quiet has not necessarily cancelled. While the contract is still in force and the customer can still call for the goods or services, the obligation remains. Paragraphs 23.129 and 23.130 deal with customers’ unexercised rights, which the standard calls breakage. Where a business expects to be entitled to an amount that customers will not claim, it recognises that amount as revenue in proportion to the pattern of rights exercised by customers; if it does not expect to be entitled to breakage, it recognises the amount when the likelihood of the customer exercising its remaining rights becomes remote. The estimate is subject to the constraint on variable consideration in paragraph 23.46.

HMRC takes a consistent line for tax. Its Business Income Manual at BIM31110 says a deposit should be recognised either when the goods or services are provided or when it is reasonably certain that no goods or services will ever be provided and the deposit will be forfeited. It adds that this applies whether or not the deposit would be forfeited if the transaction fell through.

Where only part of a deposit is kept, for example under a sliding cancellation scale, the part to be refunded stays as a liability and only the retained part is released.

What if the money arrives before there is a firm contract?

Paragraph 23.7 sets out the criteria for a contract that the revenue model applies to, including that the parties have approved the contract and are committed to it, that payment terms can be identified and that it is probable the customer will pay. Paragraph 23.9 says that if those criteria are not met, any consideration received is recognised as a liability until they are met.

Paragraph 23.10 then allows consideration received in that situation to be recognised as revenue only when either the business has no remaining obligations to transfer goods or services and has received all or substantially all of the consideration, which is non refundable, or the contract is terminated and the consideration received is non refundable. A holding deposit taken while terms are still being negotiated is therefore a liability, and becomes revenue only if one of those two events happens.

Does a long gap between deposit and delivery change the amount?

Large deposits paid well ahead of delivery can contain an element of financing by the customer. Paragraph 23.59 says that where payment is received in advance, a business may adjust the promised consideration for the time value of money and recognise the resulting interest expense under Section 11 or Section 12. Paragraph 23.60 removes the need to adjust where, at contract inception, the business expects the period between transfer and payment to be 12 months or less.

How does this look in the accounts?

Illustration only. A kitchen fitter with a 31 March year end agrees in February to supply and fit a kitchen for £12,000 and takes a non refundable deposit of £3,000. Installation takes place in May. A second customer pays a £1,000 deposit in January and cancels in March; the contract allows the fitter to keep it.

Event	Accounting entry
February: £3,000 received	Debit bank £3,000, credit contract liability £3,000
31 March year end	£3,000 remains a liability; no revenue for the first kitchen
May: kitchen fitted, balance invoiced	Debit contract liability £3,000 and trade debtor £9,000, credit revenue £12,000
January: second deposit of £1,000	Debit bank £1,000, credit contract liability £1,000
March: customer cancels, deposit retained	Debit contract liability £1,000, credit profit or loss £1,000

VAT has been left out of the figures for simplicity. On presentation, paragraph 23.128 allows other descriptions than contract liability to be used. For companies using the Schedule 1 formats in the Small Companies Regulations, the notes to the format require payments received on account of orders to be included within creditors so far as they are not shown as deductions from stocks, and allow accruals and deferred income to be shown as a separate item or within other creditors. Micro entities applying FRS 105 follow the same approach: paragraphs 18.9 and 18.10 of FRS 105 mirror the FRS 102 rules on consideration received before a contract exists, and the micro entity balance sheet includes an accruals and deferred income line. See also deferred income explained.

How do VAT and tax treat deposits?

For trading profits, section 46 of the Corporation Tax Act 2009 and section 25 of the Income Tax (Trading and Other Income) Act 2005 require profits to be calculated in accordance with generally accepted accounting practice, subject to adjustments required or authorised by law. A correctly deferred deposit is therefore normally taxed when it is released to profit or loss, which matches the BIM31110 guidance above. Businesses on the cash basis are outside that rule; see cash basis or accruals accounting.

VAT follows its own tax point rules, not the accounts. VAT Notice 700 paragraph 14.2.3 says most deposits serve as advance payments and create a tax point when received, while a deposit taken as security for the safe return of hired goods does not. Paragraph 8.13.1 says VAT is due on a retained payment for goods or services the customer fails to take up and it cannot be reclassified as outside the scope of VAT. The detail is in VAT on deposits and advance payments.

What mistakes come up most often?

• Crediting deposits straight to sales because the cash is in the bank or because the terms say non refundable.
• Releasing a deposit at the year end because the customer has gone quiet, while the contract is still live and the customer can still call for delivery.
• Treating hire or tenancy security deposits as income rather than as money owed back to the customer.
• Forgetting that VAT on a deposit is usually due when it is received, even though revenue is deferred.
• Leaving the refundable part of a partly forfeited deposit in income.
• Releasing unredeemed prepayments in bulk without the evidence paragraph 23.130 requires; the same logic applies to vouchers, covered in accounting for gift vouchers and breakage.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Related Accountapedia entries

• Accounting for customer loyalty schemes
• VAT on deposits and advance payments
• Deposits paid on fixed assets
• HMRC security deposits for PAYE and VAT
• Sale or return and customer rights of return

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• GOV.UK: Manual page BIM31110
• legislation.gov.uk: SI 2008/409, schedule 1
• Financial Reporting Council: FRS 105 September 2024
• legislation.gov.uk: Act 2009 c. 4, section 46
• legislation.gov.uk: Act 2005 c. 5, section 25
• GOV.UK: Vat guide notice 700

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.