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    Customer Deposits

    Returnable cash deposits provided by customers are a liability that arises when a company receives cash from customers in advance of delivering goods or services. These returnable deposits are classified as a short-term liability or long-term liability depending on the length of time between the date of the deposit and the end of the relationship with the customer. Customer deposits that will offset accounts receivable in the future (ie. are not returnable) are classified as unearned revenue. 

    For example, a hotel room is leased and includes a $200 damage deposit, paid by the patron up front. A journal entry is made to increase cash and a corresponding liability. 

    If the patron leaves the hotel room in the same condition she received it in, her damage deposit is returned upon checkout. 

    If the patron smokes in the room, she forefeits her damage deposit. In this case the deposit is accounted for as revenue (and the expense of cleaning the room is accounted for as well). 

    If the damage deposit is applied to the last days' rent, it is originally recorded as unearned revenue (which is also a type of current liability account). Instead of being returned to the patron at the end of her stay, it is transferred from unearned revenue to revenue when it is used to cover the rent for her last days' stay.

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