How To Record Customer Deposits & Prepayments in QuickBooks Online (Step-by-Step)

Get 30% off QuickBooks for 6 months when you sign up through my affiliate link: quickbooks.partnerlinks.io/uixlt4lvoist In this video, I walk you through how to record customer deposits (customer prepayments) in QuickBooks Online the right way — using proper revenue recognition. If your client pays before work is performed, that money is not revenue yet. It’s a liability until the service is completed. This comes up all the time for contractors, construction companies, consultants, and service-based businesses. QuickBooks Online allows two correct methods to handle customer prepayments, and I show you both, step by step: The Negative Accounts Receivable method The Customer Deposits / Current Liability (Deferred Revenue) method — my preferred, cleaner approach We’ll look at: What revenue recognition actually means How prepayments affect the Balance Sheet vs Profit & Loss Why Unapplied Cash Payment Income (UCPI) shows up How to properly recognize revenue later when the work is done Two ways to release prepayments: negative invoice line vs credit memo This tutorial is ideal for QuickBooks Online bookkeepers, accountants, and business owners who want clean reports and GAAP-friendly bookkeeping. 👇 Use the timestamps below to jump to the section you need. ⏱️ Timestamps 00:00 Intro: Customer Deposits & Prepayments 00:52 What Is Revenue Recognition? 01:14 Two Methods Overview 01:26 Method 1 – Negative Accounts Receivable Method 02:18 Step 1: Receive the Prepayment 03:09 Balance Sheet Impact (Negative A/R) 04:13 Step 2: Create the Invoice & Recognize Revenue 05:01 Income statement: Accrual vs Cash Basis 05:13 Why Unapplied Cash payment income Appears in QuickBooks 06:50 Method 2 – Current Liability Method 07:11 Step 1: Create Customer Prepayments Liability Account 07:37 Step 2: Create Prepaid Services Item 08:11 Step 3: Create Actual Service Item 08:36 Step 4: Invoice for the Deposit 09:40 Step 5: Receive the Payment [customer prepayment] 10:44 Step 6: Recognize Revenue – Two Options 10:53 Option A: Negative Line on Invoice 12:23 Option B: Credit Memo Method 13:39 Final Comparison & Wrap-Up