A deposit is a liability, not revenue.
When a customer pays a deposit on goods that have not left your store, the cash you received is a liability — you owe them either the goods or a refund. Liabilities go on the balance sheet, not the P&L. Treating deposits as revenue inflates your sales and your tax liability.
The correct journal entry on deposit receipt: DR Cash £50, CR Customer Deposits Liability £50. No revenue recognized. No VAT due (yet). The deposit sits on the balance sheet until the customer either takes delivery or cancels.
Revenue recognition on delivery.
Revenue is recognized when control of the goods transfers to the customer — typically when they walk out with the item. At that moment, the deposit liability flips to revenue, the remaining balance becomes accounts receivable (or cash if paid in full), and VAT becomes due.
Journal entry on delivery: DR Customer Deposits Liability £50, DR Cash £200 (the final installment), CR Sales £208.33, CR VAT Payable £41.67 (assuming 20% VAT on £208.33 net). Plus the COGS leg. This is the moment the books recognize the sale.
Layaway vs installments vs BNPL.
Layaway holds goods until fully paid before delivery — clean deferred-revenue treatment. Installments delivers immediately and collects payments over time — that is a sale plus AR. Buy-Now-Pay-Later (BNPL) — Klarna, Afterpay, Affirm, Clearpay — routes through a third party who pays you upfront — that is a sale plus a financing fee.
These three are accountingly different and your POS needs to know which is which. Treating an installment sale as a layaway (no revenue until full payment) understates this month's revenue. Treating a BNPL as a regular sale ignores the platform fee. Get the categorization right at the transaction level.
- Layaway: deposit + storage + delivery on full payment. Revenue at delivery.
- Installments: delivery now, payment plan. Revenue and AR at delivery.
- BNPL: third party pays you upfront. Revenue + platform fee at sale.
- Cash on delivery: revenue at delivery, COD reconciliation later.
The VAT timing question.
Under HMRC rules (and most VAT regimes), VAT is due at the tax point — when the supply happens. For layaway, that is the final-payment-and-pickup date. For installments, that is the delivery date even if subsequent payments are still pending. For BNPL, the BNPL provider settles VAT logic on the customer side, but you the merchant recognize the full sale on delivery.
Many retailers wrongly remit VAT on every installment payment, which is incorrect on installment sales (VAT was already due in full at delivery) and incorrect on layaway (VAT is not yet due). Your POS must know which is which and post the tax line at the right moment, not on every cash receipt.
Cancellations and forfeited deposits.
A customer cancels their layaway after paying £80 in deposits. Your policy is non-refundable deposits. The £80 is now revenue (or a forfeit fee, depending on how you book it) and VAT becomes due. The journal: DR Customer Deposits Liability £80, CR Forfeit Revenue £66.67, CR VAT Payable £13.33.
If your policy is refundable deposits, cancellation is a simple refund: DR Customer Deposits Liability £80, CR Cash £80. No revenue, no tax. Your POS needs both flows, and the cashier needs to know which path to take based on the original deposit terms.
Reporting unfulfilled deposits.
Customer Deposits Liability is on your balance sheet and grows when you accept deposits, shrinks when you deliver or refund. Watch the trend. If the balance is growing month over month and you are not adding deposit-customer count, something is wrong — typically deposits that were never fulfilled and never cleared.
Best practice: a monthly review of all open layaway and deposit balances. Any deposit older than 90 days needs a flag. Either the customer is coming, or they have abandoned, or there is a system error. Stale deposits are a balance sheet liability that quietly inflates over years if not managed.
The customer experience matters.
The accounting is internal. The customer experience is what they see. Print a clear deposit receipt that shows: total goods value, amount paid today, balance remaining, expected delivery date, refund policy. Three lines covering all of that. Customers should never have to ask "did my payment go through."
For installments, monthly statement reminders go a long way. A customer who has not paid this month's installment may have forgotten, not defaulted. An SMS or email reminder five days before due date converts most "almost-defaults" into on-time payments.
Why some retailers retire layaway.
Layaway has shrunk as a category — most retailers globally have migrated to BNPL (Klarna, Afterpay, Affirm) which delivers immediately, pays the merchant upfront, and shifts the credit risk to the financing partner. The deferred-revenue mechanics still apply to deposits but the classic delivery-on-final-payment layaway is rare outside furniture and high-ticket appliances.
If you offer payment plans today, you are most likely doing installments (deliver now, collect later) or BNPL (third-party financing). Both are fully supported in Nonari with correct deferred-revenue and AR treatment. Classic layaway is preserved as a deposit-with-hold pattern for the retailers who still need it.