Customer Prepayments in QuickBooks Online (Step-by-Step Tutorial)

In this video, I walk you through how to record customer deposits (customer prepayments) in QuickBooks Online the right way — using proper revenue recognition.
If your client pays before work is performed, that money is not revenue yet. It’s a liability until the service is completed. This comes up all the time for contractors, construction companies, consultants, and service-based businesses.
QuickBooks Online allows two correct methods to handle customer prepayments, and I show you both, step by step:
The Negative Accounts Receivable method
The Customer Deposits / Current Liability (Deferred Revenue) method — my preferred, cleaner approach
We’ll look at:
What revenue recognition actually means
How prepayments affect the Balance Sheet vs Profit & Loss
Why Unapplied Cash Payment Income (UCPI) shows up
How to properly recognize revenue later when the work is done
Two ways to release prepayments: negative invoice line vs credit memo
This tutorial is ideal for QuickBooks Online bookkeepers, accountants, and business owners who want clean reports and GAAP-friendly bookkeeping.
👇 Use the timestamps below to jump to the section you need.

⏱️ Timestamps
00:00 Intro: Customer Deposits & Prepayments
00:52 What Is Revenue Recognition?
01:14 Two Methods Overview
01:26 Method 1 – Negative Accounts Receivable Method
02:18 Step 1: Receive the Prepayment
03:09 Balance Sheet Impact (Negative A/R)
04:13 Step 2: Create the Invoice & Recognize Revenue
05:01 Income statement: Accrual vs Cash Basis
05:13 Why Unapplied Cash payment income Appears in QuickBooks
06:50 Method 2 – Current Liability Method
07:11 Step 1: Create Customer Prepayments Liability Account
07:37 Step 2: Create Prepaid Services Item
08:11 Step 3: Create Actual Service Item
08:36 Step 4: Invoice for the Deposit
09:40 Step 5: Receive the Payment [customer prepayment]
10:44 Step 6: Recognize Revenue – Two Options
10:53 Option A: Negative Line on Invoice
12:23 Option B: Credit Memo Method
13:39 Final Comparison & Wrap-Up