The client paid a deposit. How do I account for it?

Ten thousand up front on a ninety thousand pound extension. Reasonable, common, and routinely accounted for by the most dangerous method in small building: putting it in the account and forgetting what it is.

What a deposit actually is

Money for work you have not done. Until the work exists, it is closer to a debt than to income: if the job stopped tomorrow, the unearned part would be owed back. That single sentence is the whole discipline; everything below is mechanics.

Asking for one, so it gets a yes

A deposit request lands better when it is specific and self-liquidating: what it funds, and how it comes back.

• Tie it to real early cost: materials ordered before you start, long-lead items, mobilisation. “Ten per cent to cover the roof order and scaffold” reads differently from “ten per cent because”.
• State the recovery in the same sentence: how the deposit is worked off against the payments that follow, so the client can see it is an advance, not an extra.
• Keep it modest on domestic work. A deposit clause in a contract with a consumer is subject to the fairness test in the Consumer Rights Act 2015: a sensible figure with a stated purpose stands, an outsized one invites the argument at the worst moment. The same trap as writing your own interest rate.

The recovery schedule

Decide before the first valuation how the deposit is earned back, and write it down. The clean method: deduct it from the payments in stated steps, in proportion or front-loaded, until it reaches zero, and show the running balance on every application: work done, less deposit recovered this time, deposit still unearned.

The VAT point most people miss

If you are VAT-registered, taking the payment creates a tax point: receiving money before the work is supplied triggers VAT on the amount received (HMRC VAT Notice 700, tax points). A deposit banked gross in March and not accounted for until the first invoice in June is a quiet error with interest on it. If in doubt on a particular structure, that is an accountant question, and a cheap one.

What to do this week

1. For any deposit already held, write down the unearned balance today and put it on the next application as a line.

2. Put the deposit paragraph into your standard quote: purpose, amount, recovery schedule, one sentence each.

3. Keep the mirror in view: the same money one link down the chain, paying your subcontractor before you are paid, and where a client wants security for their advance, that is an advance payment bond, which is a different animal entirely.