Creating and Completing Deposit Invoices

Understanding Deposit Invoices — Why They Work the Way They Do

When a customer pays a deposit, that money is not yet income. It represents an advance payment for goods or services you haven't yet delivered. Until you fulfil your side of the agreement, those funds are effectively held on the customer's behalf — a commitment you owe them in the form of goods or work, not money you've earned.

This distinction matters for three important reasons:

1. Revenue should only be recognised when the supply is made Under standard accounting principles, income is recorded when the obligation is fulfilled — when goods are delivered or services are completed. Recording a deposit as income at the time it's received overstates your revenue, distorts your P&L, and misrepresents the financial position of your business.

2. The deposit is a liability until completion In your accounting system (Xero or MYOB), a deposit should be posted to a liability account — not an income account. This correctly reflects that you owe the customer a delivery. Only when the final invoice is raised and the job is completed does the amount transfer to income, recognising the revenue at the right time.

3. GST still applies at the time the deposit is received It's worth noting that for GST purposes, the ATO requires GST to be remitted when a deposit is received — even if the goods or services haven't yet been delivered. M-Power handles this correctly: GST is captured on the deposit invoice, while the principal amount is held in the deposit liability account until completion.

4. Clean separation between the job, the pre-payment, and the final sale

M-Power maintains a clear separation between three distinct things that are often conflated in simpler systems:

• The job is the source of truth for quantities and values — what was ordered, at what price. This is where "orders raised" metrics are captured, attributed to the correct period based on when the order was placed.
• The deposit invoice is a financial instrument only — it represents the customer's pre-payment against that job. It is not the sale; it is the commitment to deliver.
• The final invoice is where the sale is crystallised — the quantities and values actually delivered are confirmed, and the deposit is cleanly reversed out. The reversal replaces the deposit financially, but both records are retained distinctly, preserving a clear audit trail of the pre-payment and the completed sale as separate events.

This separation means your reporting can accurately distinguish between work that has been ordered and work that has been completed and delivered — and your accounting system always reflects the correct position, with deposit funds held as a liability right up until the moment the final invoice is issued.

Handling deposits informally — as payments or manual adjustments rather than proper deposit invoices — would collapse this structure, making it impossible to accurately attribute order values to the correct period or maintain a clean record of pre-payments vs completed sales.

The deposit invoice process in M-Power follows this best practice automatically. The workflow below covers two phases:

• Phase 1 — Creating the Deposit Invoice: Raise a deposit invoice for the agreed amount or percentage and record the customer's payment against it.
• Phase 2 — Completing the Invoice: When the job is done, convert to a final invoice. M-Power will apply the deposit and generate the correct accounting entries automatically, clearing the liability and recognising the full revenue.

⚙️ Before you start: Ensure you have a dedicated deposit/liability account set up in Xero or MYOB and that the corresponding item/GL code is configured in M-Power. If you haven't done this yet, contact your accountant or bookkeeper to set up a Customer Deposits or Deposits Held liability account before processing your first deposit invoice.