Depending on the type of business you run, you may regularly provide your customers with quotations, invoices, delivery notes, receipts, and other such documents. While quotations and delivery notes are somewhat straightforward, invoices are an entirely different beast. A typical invoice records and itemizes a transaction between a buyer and a seller. If the products or services aren’t paid for on delivery, the invoice may also specify the agreed payment terms. As such, invoices are invaluable tools, not only for keeping track of payments and amounts owed but also for calculating tax obligations.
Sometimes businesses may require new customers to make a down payment before they commence a project or deliver a product. The rest of the payment would, therefore, be due at specific milestones or upon delivery of the goods or services in question. For example, if the total value of your goods or services is $5,000, you can request a $1,000 down payment. In such a case, you can handle the invoice in one of two ways:
Option 1: Single Invoice
When a client places an order, a business can prepare a single invoice for the full amount owed. Using our example, the total amount would be $5,000. The description column would, however, indicate that a $1,000 deposit is required for the project to start or for a product to be dispatched. Your business would, therefore, issue a $1,000 receipt when the down payment is made and another for $4,000 upon completion of the project, when the invoice is paid in full.
Most businesses report sales tax on an accrual basis. When they report sales tax, they would have based it on the full invoiced amount of $5,000, even before the completion of the project and payment of the balance due. As such, this first option is best suited for transactions where the period between invoicing and payment is extremely short.
Option 2: Deposit Invoice
The second option answers the question, what is a deposit invoice? Using this option, you would issue out two invoices to your client — the first one for $1,000 to confirm their order, then another one for $4,000 when you deliver your products or services. The description column on the first invoice indicates that the payment due is a deposit for the total amount of $5,000. The first invoice total would, however, still be $1,000.
A deposit invoice is typically used for projects which may take some time to reach completion and would be due for tax returns before the final payment is due. If VAT is applicable for the invoice, it can also be added to the down payment. Using a deposit invoice would, therefore, accurately account for your sales, net profit, and sales tax. Businesses may also use deposit invoices to bill clients at various milestones based on the actual amount of work completed.
Deposit Invoice Format
If you’re not entirely sure what details to include, impulsively creating deposit invoices could result in a complete mess of your accounting system. In the worst case, you may undervalue the amounts due to your business or incorrectly report your tax obligation and attract penalties.
The basic requirements for a deposit invoice include a form of identification, usually on the top part. This identification makes it easier to quickly pinpoint what a particular transaction is for. In the item description column, a deposit invoice should show what the deposit is for, the payment terms, and the total amount due upon delivery of the products or services rendered.