Plain definition
Customer deposits are cash received before the company has delivered the promised goods or services. They improve cash timing, but they also create an obligation to perform, deliver, or refund under the contract; receiving a deposit is not the same as earning revenue.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A design studio receives a deposit for a project. It uses the deposit to book specialist work, but the contract requires refund if the studio fails to begin by an agreed date. The project manager tracks the delivery milestone and the finance manager keeps the remaining obligation visible instead of treating the whole deposit as free cash for unrelated spending.
Why it matters
Deposits can fund early work, yet they can create a sharp cash need if cancellation or delayed performance triggers refunds.
Practical consequence
Keep a schedule of deposits by customer, contract, delivery milestone, refund condition, tax treatment, and expected revenue recognition. Reconcile it to the bank and contract records. Reserve enough liquidity for likely refunds and do not use customer advances to conceal a recurring operating cash deficit.