Bookkeeping Basics · Edmonton
Unearned revenue and customer deposits: not yours yet.
When a customer pays before you do the work, that money is a promise, not income. Here's how to record deposits, retainers, packages and gift cards properly.
By the Plum team- Updated Oct 2026
- 9 min read
- Money received before you deliver is unearned revenue, a liability.
- It becomes revenue when you do the work or hand over the product.
- Prepayments generally carry GST when received; gift cards generally don't until they're used.
- Use a Customer deposits liability account, then apply it to the final invoice.
- Recording deposits as sales overstates income and makes year-end tax messy.
Unearned revenue and customer deposits are the same idea with different names. A customer pays you before you've done the work: a wedding deposit, a renovation deposit, a 10-class pass, a three-month coaching retainer, a gift card. The cash is real and it's in your bank. But you haven't earned it yet, and until you do, you owe the customer something.
That's why, in double-entry bookkeeping, unearned revenue is a liability, not income. This guide shows the full life of a deposit with a worked example and balanced journal entries, explains the GST treatment in Alberta, and covers how to set it up in QuickBooks Online.
1Why unearned revenue is a liability
Think about what happens if you cancel. You'd have to refund the deposit or deliver the work. Either way, the business has an obligation, and obligations are liabilities. As you deliver, the obligation shrinks and revenue grows by the same amount.
It's the mirror image of a prepaid expense. When you pay a supplier a year ahead, you hold an asset. When a customer pays you ahead, you hold a liability. Same timing difference, opposite side of the deal.
Getting this right matters for three reasons. Your monthly profit stops spiking in months when lots of deposits come in. Your balance sheet shows how much work you owe customers. And at year end, money for next year's work doesn't inflate this year's income.
2Recording unearned revenue and customer deposits: a worked example
Say you're a wedding photographer in Edmonton, registered for GST. In March, a couple books you for an August wedding. The package is $4,000 plus GST, and your contract asks for a $1,000 deposit that applies to the price.
March: the deposit arrives
Because the deposit is a prepayment toward the price, GST generally applies when you receive it: $1,000 × 5% = $50. The couple pays $1,050.
| Account | Debit | Credit |
|---|---|---|
| Business chequing | $1,050.00 | |
| Customer deposits (liability) | $1,000.00 | |
| GST payable | $50.00 | |
| Totals | $1,050.00 | $1,050.00 |
No revenue yet. Your March profit and loss doesn't change, but your balance sheet now shows $1,000 owed to a customer in the form of future work. The $50 GST goes on the GST return that covers March.
August: the wedding, and the final invoice
You shoot the wedding and invoice the full $4,000 plus $200 GST, less the deposit already paid. The balance owing is $3,150.
| Account | Debit | Credit |
|---|---|---|
| Customer deposits (liability) | $1,000.00 | |
| Accounts receivable | $3,150.00 | |
| Photography revenue | $4,000.00 | |
| GST payable | $150.00 | |
| Totals | $4,150.00 | $4,150.00 |
The full $4,000 is now revenue, in August when you earned it. The deposit liability is cleared. GST on the invoice is only the remaining $150, because $50 was already reported in March. Total GST: $200, exactly 5% of $4,000.
September: the couple pays the balance
| Account | Debit | Credit |
|---|---|---|
| Business chequing | $3,150.00 | |
| Accounts receivable | $3,150.00 | |
| Totals | $3,150.00 | $3,150.00 |
3Packages, retainers and gift cards
| What the customer pays for | When it becomes revenue | GST, generally |
|---|---|---|
| Deposit on a project or event | When the work is done (or as it's done) | When the prepayment is received |
| Class pass or session package | As each class or session is used | When the package is paid for |
| Monthly or annual membership paid ahead | Spread over the months it covers | When paid |
| Retainer for future work | As the work is performed | When received, if it's a prepayment |
| Gift card or gift certificate | When redeemed | When redeemed, not when sold |
| Refundable security deposit | Only if it's kept or applied to the price | When it's applied or forfeited |
Say you're a personal trainer in St. Albert selling a 10-session package for $800 plus GST. The $800 goes to unearned revenue when it's paid, and each session you deliver moves $80 into revenue. If a client has used four sessions by month end, $320 is revenue and $480 is still a liability.
Gift cards work differently for GST. Selling one is generally not a taxable sale; GST applies when the card is used to buy something taxable. So a $100 gift card sale is recorded as $100 to a Gift card liability, with no GST until redemption. Unredeemed or expired balances have their own rules, so ask your accountant before you clear old ones into income.
Cancellations: refunded or kept
Back to the photographer. Say the couple cancels in June. If you refund the $1,050, the entry simply reverses the March receipt: debit Customer deposits $1,000, debit GST payable $50, credit the bank $1,050. Nothing ever touched revenue, so nothing needs to come out of it. That's one of the quiet benefits of recording deposits properly.
If your contract lets you keep the deposit, the $1,000 moves from Customer deposits to revenue (often a separate Cancellation fees account so you can see how often it happens). The GST already reported in March generally stays reported. Forfeited deposits can have their own GST treatment depending on how the contract is written, so confirm the details with your accountant the first time it happens.
What your accountant does with the balance at year end
For income tax, amounts you've received for work you haven't done yet can generally be held back as a reserve, so they're taxed in the year you earn them rather than the year you bank them. Your accountant will ask for the Customer deposits balance at year end, ideally listed customer by customer. If deposits were recorded as sales all year, that list has to be rebuilt from scratch, which is slow and expensive.
4Customer deposits in QuickBooks Online
There are a few ways to do this in QuickBooks Online. A simple and reliable one:
- Create the account. Add a Customer deposits account with the type Other Current Liabilities. Our chart of accounts guide shows where it sits.
- Create a Deposit item. In Products and services, add a service item called "Customer deposit" whose income account is your Customer deposits liability account, not a revenue account. Set its sales tax to GST.
- Record the deposit with a sales receipt (or a deposit invoice the customer pays) using that item. The money hits the liability, not revenue, and GST is recorded.
- Apply it on the final invoice. Add the full job using your normal revenue item, then add the Customer deposit item as a negative line for the deposit amount. The invoice shows the balance owing, and the liability clears.
- Check the balance. Run a report on the Customer deposits account each month. Every dollar should match a booked job that hasn't happened yet.
QuickBooks invoices also have a built-in Deposit field you can turn on in sales settings, but it records the payment against that one invoice. The liability-item method works better when deposits arrive months before the work is invoiced.
5Common mistakes with unearned revenue
- Recording deposits as sales. Income looks great in busy booking months and terrible when you're actually doing the work.
- Charging GST twice. If GST was charged on the deposit, only charge GST on the remaining balance in the final invoice.
- Forgetting unused packages. Class passes and session bundles that are half used still need the unused part in the liability.
- Charging GST on gift card sales. It's generally charged at redemption.
- No reconciliation of the deposit account. Old deposits from cancelled jobs sit there forever unless someone reviews them.
Deposit housekeeping each month
Unearned revenue is one of the clearest examples of why accrual accounting gives a truer picture than cash alone. If deposits are a big part of your business, Plum can set this up and run it monthly for you, whether you're in Edmonton, St. Albert, Sherwood Park or Spruce Grove. Book a quick call or see our pricing.
6Questions people ask
Is unearned revenue a liability or income?
A liability. Until you deliver what the customer paid for, you owe them either the work or a refund. It becomes revenue when you deliver.
How do I record a customer deposit?
Debit the bank for the amount received, credit a Customer deposits or Unearned revenue liability account for the deposit, and credit GST payable if GST applies to it. When you invoice the job, apply the deposit against the invoice instead of recording new income.
Do I charge GST on a deposit in Alberta?
If the deposit is a prepayment toward the price, GST at 5% generally applies when you receive it. A refundable security deposit is generally not taxed until it's applied to the sale. Check how your contracts are worded with your accountant.
Do I charge GST when I sell a gift card?
Generally no. GST is usually charged when the gift card is redeemed for taxable goods or services, not when it's sold. Until then, the balance sits as a liability in your books.
Do I pay income tax on deposits I haven't earned yet?
Amounts received for work you haven't done yet can generally be held back as a reserve on your tax return, so you're taxed when you earn them. Your accountant handles this at year end.
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Book a free 15-min callThis article is general information for Alberta businesses and isn't tax or legal advice. Rules and thresholds change, so confirm your situation with your accountant or CRA.