Is That Deposit Really Revenue?
Money entering your business bank account does not automatically mean your business earned revenue. A deposit tells you that money arrived. It does not tell you why it arrived or how it should be recorded. That matters. Customer payments, loan proceeds, money you contribute personally, and transfers between business accounts can all increase the balance in a bank account. But they do not all represent sales.
Before recording a deposit, ask: Where did this money come from, and what does it represent?
Four deposits, four different explanations
1. A customer payment
Suppose a customer pays $1,000 for work your business completed. That payment relates to a sale, but how you record it depends on what is already in your books. If you previously created an invoice, the payment should be applied to that invoice through your bookkeeping system. Before adding a separate revenue entry, check whether the invoice, payment, or deposit has already been recorded. Otherwise, you could record the same sale twice, which overstates your income and equity (higher taxes) or leave a paid invoice showing as unpaid, which overstates accounts receivable, leading to a potentially uncomfortable conversation with a customer.
The timing of when revenue appears on your reports also depends on whether you use cash or accrual accounting. Receiving the money and earning the revenue are not necessarily the same event.
2. Loan proceeds
Suppose your business receives $10,000 from a lender. Your bank balance increases, but your business did not make $10,000. It borrowed money that it has an obligation to repay.
The deposit should increase cash and the appropriate loan liability, which tracks what the business owes. Recording it as revenue would make sales and profit appear higher than they actually are while failing to properly reflect the borrowing.
3. An owner contribution
Suppose you move $2,000 of your personal money into the business as a capital contribution to help cover upcoming expenses. The business has more cash available, but it did not earn that money from customers. An owner’s capital contribution is recorded in equity, the section of the balance sheet that tracks the owners’ interest in the business.
If you intend the money to be a loan to the business instead, its treatment would be different. Clarify the arrangement rather than assuming every deposit from an owner belongs to the same account.
4. A transfer between the same business’s accounts
Suppose you transfer $3,000 from your business savings account to its checking account. Checking increases by $3,000, but savings decreases by the same amount. The business has moved existing money. It has not earned additional revenue.
Record the movement as a transfer between those accounts. Both sides need to reflect the same transaction without creating a sale or an expense.
Why the classification matters
Your reports help you assess whether sales are growing, whether the business is profitable, and how much it owes. If borrowing, owner contributions, or transfers are recorded as revenue, those reports can give you the wrong impression. You might believe customer sales improved when the additional cash actually came from financing or your own pocket.
A correct bank balance alone does not mean the rest of the books are correct. The deposit amount can be right while its classification is wrong.
Review five recent deposits
Choose five recent deposits in your business bank account. For each one:
- Identify the source. Who sent the money, and why?
- Find the supporting record. Check the invoice, payment details, loan documents, contribution records, or transfer confirmation.
- Compare the source with the recorded treatment. Does the entry reflect a customer payment, borrowing, owner investment, or movement between accounts?
- Check for an existing entry. If it relates to an invoice, review how the invoice and payment were recorded before adding another revenue entry.
- Investigate anything uncertain. Note what needs clarification and gather the missing information before changing the books.