What is the Accounting treatment of deposits of items to be sold?

[businessor]

Hello!

Let's say I ask for deposit from buyers before a product is actually developed and ready to sold (similar to experimental products on Kickstarter).

How are these deposits accounted in my Statements? Of course they are revenues/profits but they are not 'real' in the terms that they may not realise if people cancel or if the product never materialise.

Thanks!

 

[Deleted member 277242]

The initial payment shouldn't affect revenue or profit

Initial posting would be:
Debit Bank Account
Credit Deposits Control Account

This essentially shows as a liability on your balance sheet. You have the deposit but you technically owe the money as you haven't produced or sold the product yet.

Once you sell the product:

Debit Deposits Control Account
Credit Sales

At this point you are essentially recording it as a sale.

 

[WaveJumper]

Out of interest do the deposits have to be held in a separate bank account or "ring fenced" in anyway

 

[Deleted member 277242]

In the scenario you described no. You can keep the funds in your main bank account and account for it on your ledgers via the postings mentioned.

Note that there are special rules regarding deposits in certain sectors (e.g. housing) or if your client contract requires the deposit is held in escrow. From the scenario described I don't think this is the case.

 

[DontAsk]

Out of interest do the deposits have to be held in a separate bank account or "ring fenced" in anyway

Regardless of the legalities, I think they should be, as a selling point to re-assure buyers.

 

[Deleted member 277242]

Regardless of the legalities, I think they should be, as a selling point to re-assure buyers.

Unless it's in a protected scheme or escrow not sure what confidence the buyer would have if the money is in a separate account that you also have access to.