How to account for non-refundable deposits

SOLVED

We started taking 25% non-refundable deposit on every booking this year- this money goes straight into the bank.  The balance of the stay is paid when the guest arrives (sometimes in the following year).  If the guest cancels we retain the deposit regardless (thus non-refundable).

On some advice (which I have a feeling was bad...),  I had begun using the GJ to debit the 2460 deposit liability account when the deposits were received and then credit it again when money was deposited in the bank. Her understanding was that since the deposit was non-refundable I would count it as income in that month in which I took the deposit.  

Upon further research, I came across a few forum posts saying that even though it's non-refundable it's not realized income until the guest comes and pays the balance.  Which is correct?

Secondly, I'd like to be able to switch over to creating invoices etc but I imagine it's too late since I've already posted a couple months worth of deposits. (If that's an "easy" fix please let me know!)   If I have to continue using the GJ, and the way I've been doing it is indeed wrong, how do I account for the money in the bank? (meaning, I have money in my bank now, but it's not technically realized income until the guest comes to stay)

  • 0

    Hi TCF,

    It is ok to put the money to bank when a customer makes a prepaid sales/deposits.  If you look at the Receipt window and use the deposit amount box, when you make an entry, it will debit the bank account and credit the prepaid sales/deposits account.  Since the prepaid sales/deposits account is a liability account, it will not show up in the income statement, which contains revenue and expense account only.  The idea of making a prepaid sales/deposits is that this deposit will be recorded under the customer's ledger and it can be used to pay the invoices that you will create later. 

    As per your description, looks like the deposit should be treated as revenue already at the time you receive as it is non-refundable.  If this is the case, you may need to create invoice for the 25% deposit so it will debit the bank account and credit the revenue account.  Then, you will create a second invoice for the outstanding balacne when your customers actually show up.

    For those entries that you have already made, you may need to debit the 2460 deposit liability and credit the revenue account (4000 levels) based on the time you enter the entries.

    Since I am not an accountant or bookkeeper, I cannot tell you this is right or wrong.  We have a lot of knowledgable user with accounting and bookkeeping background that can give an accurate answer about this topic. 

    If you need to consult one of our accountant partners, you can also follow the link below:

    http://na.sage.com/sage-50-accounting-ca/support/find-a-consultant

    Hope this helps.

     

  • 0
    verified answer

    Hi TCF,

    You are correct.  The deposit is a liability until the guest checks out, then it becomes income.  This is the way it should be handled:

    1) Invoice the customer for the deposit and post it to your liability account.

            Accts Rec.          DB  $25.00

            Liability Acct        CR               $25.00

    2) When the customer pays, deposit it in the bank and apply it to the invoice.  

            Bank Acct           DB  $25.00

            Accts Rec.         CR               $25.00

    3) When the customer checks out, invoice for the full amount, and subtract their deposit.

            Income               CR               $100.00

            Liability Acct       DB  $25.00

            Accts Rec.         DB  $75.00

    4) When the customer pays, deposit it in the bank and apply it to the invoice.

            Bank Acct           DB  $75.00

            Accts Rec.         CR               $75.00

    5) What if the customer doesn't show up?  Generate another invoice.  The first line would be a charge to income and the second line would be a credit to the liability account.  The invoice amount will be $0 but the correct GL accounts will be affected.

            Income               CR               $25.00

            Liability Acct       DB  $25.00

    I hope this helps.

  • 0 in reply to Jenn5353

    I post the deposit as a payment on account and I do not have it linked to prepayment - the deposit is entered under the customer name in Acct Rec Receipt module and the coding is Dr bank and Cr A/R

    When the customer arrives then an invoice is created for the booked period. The customer will pay the difference between the invoice total and the prepaid amount.

    If the customer cancels then an invoice is created for the amount of the deposit to revenue and also showing the taxes. If cancelled deposit was 160.00 then dived by applicable taxes and code to revenue with the rest coded to the taxes. The date would be the date the customer cancelled.

    this way you can run an AR aged listing and see who has prepaid and not arrived yet to verify that they have not cancelled booking and are still coming.

  • 0 in reply to Smith and Co

    If the prepaid deposit carry past the Year-End date then you would need to make an entry to record these into prepaid liability account as of last day of Year-End and reverse this entry on the 1st day of new Fiscal year.

  • 0 in reply to Smith and Co

    Thanks everyone! I will go through these a little more closely today and see if I have any more questions

  • 0 in reply to TCF

    TCF: I like smithco's idea because you can run the aged listing and see who has prepaid and not arrived.

  • 0 in reply to Jenn5353

    Thanks everyone!  I marked Jenn's answer because it's what I need a the moment but I'm logging Smithco's idea away for next season.