Definition
The term refundable deposits refers to cash collected from credit customers that a company expects to return after a specified period of time, or when certain conditions are satisfied. When companies collect this money, the intention is to return it after a relatively brief period of time. Following the receipt of the cash, the company would classify the refundable deposit as a current liability on the balance sheet.
Explanation
Current liabilities are defined as debts that must be paid within one year or one operating cycle, whichever is longer. Refundable deposits are part of a larger group of liabilities from advance collections, which is a component of the company's definitely determinable liabilities, since it's both known to exist and can be measured precisely.
Refundable deposits are typically collected when a company extends credit to a customer, and the company does not have any information on their creditworthiness. For example, utilities typically provide service in advance of receiving payment. That is to say, an electric or gas customer pays their utility bill after they've consumed this energy. Through this arrangement, the utility is extending the customer credit.
If the utility does not have sufficient information to understand the credit risk of the customer, they may require a refundable deposit. Once the customer has demonstrated they do not present a risk of non-payment, the utility will return the deposit or credit their account. If the customer does not pay their bills, the company can use the deposit to offset these bad debts.
When a company collects this money from a customer, there is an increase to cash and a corresponding increase to the current liability refundable deposits.
Example
Company A requires a $250 deposit from new credit customers, which is returned when they pay their invoice on time for six consecutive months. In the month of December, Company A collected $250,000 in deposits from customers. Company A was also able to return $100,000 in deposits to customers in that same month.
Unfortunately, a number of customers did not meet the terms of their agreement. Company A denied these customers future credit, and used the deposits to repay $25,000 of outstanding invoices.
The journal entry to record the collection of deposits would be as follows:
| Debit | Credit | |
| Cash | $250,000 | |
| Deposits Collected from Customers | $250,000 |
While the journal entry to record the return of deposits would be as follows:
| Debit | Credit | |
| Deposits Collected from Customers | $100,000 | |
| Cash | $100,000 |
Finally, the journal entry to record the forfeited deposits would be as follows:
| Debit | Credit | |
| Deposits Collected from Customers | $25,000 | |
| Revenue | $25,000 |
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