The correct way to do customer advances in QuickBooks Desktop

The core accounting rule

Intuit’s guidance is blunt: upfront deposits and retainers are liabilities, not income, even though the money lands in your bank.

• You record the deposit to an Other Current Liability account.
• You move it to income only when you deliver the product or service and apply it to an invoice.

Step-by-step workflow (Intuit’s method)

Step 1: Create an Other Current Liability account (example name: Upfront Deposit). Intuit recommends a zero opening balance unless you are tracking existing deposits.

Step 2: Create an item linked to that liability account (Service or Other Charge, depending on what the deposit is for).

Step 3: Record the deposit using Enter Sales Receipts and the Upfront Deposit item. If you do not choose a Deposit To account, QuickBooks will treat it as Undeposited Funds.

Step 4: Create the invoice for the actual products or services.

Step 5: Apply the deposit using one of Intuit’s two options:

• Option A: add the Upfront Deposit item as a line item on the invoice, which reduces the amount due.
• Option B: create a credit memo using the Upfront Deposit item, then apply that credit to the invoice.

Why “customer balance is zero” is not the same as “invoice is closed”

In QuickBooks Desktop, it is possible for the customer’s A/R balance to net to zero while individual invoices are still open. The most common cause is that credits or payments are not applied to the intended invoice.

• A credit memo can exist but be unapplied, so it does not close the invoice you think it should.
• An incorrect credit application can be removed and re-applied to correct balances.

If an invoice was paid and later shows open due to a credit issue, Intuit provides steps to unapply and correct the credit application.

Common mistakes that break reporting

• Using a fake income item for advances: it inflates income today and forces manual cleanup later.
• Using journal entries for customer deposits: you lose the clean link between deposit, invoice, and customer reporting.
• Not using the liability item: your balance sheet no longer reflects what you actually owe customers in undelivered work.

References

• Intuit: Manage upfront deposits or retainers in QuickBooks Desktop
• Intuit: Remove or unapply a credit from an invoice

Related reading: Write Check vs Expense vs Receive Payment vs Journal Entry.