In NetSuite, when a customer makes an advance payment, the Accounts Receivable (A/R) account is not directly affected at the time of recording a Customer Deposit. Instead, the payment is recorded as a liability, because the payment is considered an obligation to deliver goods or services in the future. A/R only comes into play when the goods or services are delivered and an invoice is issued.
Let’s break this down step by step, explaining the General Ledger (GL) impact for different transactions:
1. Customer Deposit (Advance Payment)
When a customer makes a deposit or advance payment, this does not affect A/R because the payment is not yet tied to any invoiced transaction. Instead, the payment is treated as a liability, which reflects the company’s obligation to deliver the goods or services.
General Ledger Impact:
- Debit: Bank (or Undeposited Funds) – The payment received from the customer is debited to the bank account (or Undeposited Funds account if the deposit hasn’t been made yet).
- Credit: Customer Deposits (Liability) – The amount is credited to the Customer Deposit liability account, indicating that you owe goods or services to the customer.
Example:
A customer deposits Rs.1000 in advance.
- Debit: Bank Rs.1000
- Credit: Customer Deposits Rs.1000 (Liability)
2. Invoice Issuance (Sales Order Fulfilled)
When you fulfill the customer’s order (e.g., deliver goods or provide services), an invoice is created. At this point, the Accounts Receivable account is affected because the invoice represents a claim for payment (money owed by the customer). However, if the deposit is applied to the invoice, the customer’s A/R balance will decrease accordingly.
General Ledger Impact (for the Invoice):
- Debit: Accounts Receivable – The total amount of the invoice, representing the amount now due from the customer.
- Credit: Sales (Revenue) – The total amount of the invoice, recognizing revenue for goods/services delivered.
- Credit: Applicable Taxes – If there are taxes on the sale, the applicable tax account is credited.
Example:
The company issues an invoice for Rs.1500.
- Debit: Accounts Receivable Rs.1500
- Credit: Sales Rs.1500 (plus any applicable tax credits)
3. Applying the Customer Deposit to the Invoice [Deposit Application record]
When the customer deposit is applied to the invoice, the liability recorded as Customer Deposits is reduced, and the A/R balance is also reduced, reflecting that part (or all) of the amount owed has been prepaid by the customer.
General Ledger Impact (when deposit is applied):
- Debit: Customer Deposits (Liability) – The amount of the deposit applied to the invoice is removed from the liability account.
- Credit: Accounts Receivable – The deposit reduces the amount the customer owes.
Example:
If the original deposit was Rs.1000 and the invoice is Rs.1500, you apply Rs.1000 of the deposit to the invoice.
- Debit: Customer Deposits Rs.1000
- Credit: Accounts Receivable Rs.1000
- The remaining balance in A/R will be Rs.500 (the portion of the invoice that wasn’t covered by the deposit).
4. Final Payment (If Needed)
If the deposit does not fully cover the invoice, the customer will need to pay the remaining balance. When this payment is received, it affects the A/R account.
General Ledger Impact (for final payment):
- Debit: Bank (or Undeposited Funds) – The payment received from the customer.
- Credit: Accounts Receivable – The remaining balance of the invoice is settled.
Example:
If the customer pays the remaining Rs.500:
- Debit: Bank Rs.500
- Credit: Accounts Receivable Rs.500
Summary:
- Customer Deposit: Liability is increased (A/R is not affected).
- Invoice Issued: A/R is increased.
- Deposit Applied: Liability is reduced and A/R is reduced.
- Final Payment: A/R is cleared, and bank account is increased.
The A/R account is only affected when an invoice is created or when a payment is applied directly to an invoice. Customer deposits, being a liability, do not affect A/R until they are applied to the actual sales invoice.