When you place an inventory order, your vendor may require that you put down a deposit before the order is filled and shipped. You can treat the inventory deposit as an expense or as an asset. If you treat your deposit as an asset, you disclose the total amount of your inventory deposits on the balance sheet. Inventory is classified as a short-term asset if it is consumed or turned into cash in one year or less. Your inventory deposit is likewise listed on the balance sheet as a short-term asset.
A vendor can use a price range to determine the deposit amount. For example, say you place an order for $2,000 of inventory. For orders between $1,000 and $3,000, your vendor requires a $500 deposit before filling your order. A vendor can also calculate the deposit amount based on a percentage. For example, your vendor may require a 5 percent deposit on orders between $100 and $1000, and a 10 percent deposit on orders between $1,000 and $3,000.
If you require prepayment deposits from your customers, you must keep your customer deposits separate from your vendor deposits. To prevent confusion, vendor deposits and customer deposits are held in separate accounts on the balance sheet. The vendor deposits account is subdivided into individual vendor accounts. You open a separate account for each vendor identifying the deposit amount along with the purchase invoice information. The account remains open until the vendor returns the deposit or credits the amount to your invoice.
When you pay an inventory deposit, you decrease the cash account and increase the vendor deposits account on your balance sheet. For example, say you pay vendor ABC a $1,000 inventory deposit. You debit ABC’s individual vendor account for $1,000. If you use a manual accounting system, you increase the vendor deposits balance sheet account by $1,000. If you use an accounting software program, it automatically updates the vendor deposits account. You credit the cash account by $1,000 to reduce the balance in that account.
If your vendor applies the deposit to the invoice, you debit inventory for the full amount, credit vendor discounts for the deposit amount and credit cash for the difference on the balance sheet. For example, say you order $5,000 of inventory from ABC Company and pay a $2,000 inventory deposit. When you receive the order, you debit inventory for $5,000, credit ABC’s vendor account for $2,000 and credit cash for $3,000. If ABC applies the deposit to your next order, you keep ABC’s vendor account open until the next time you place and pay for an inventory order.