My question is how I handle the deposit after I enter the Credit Memo for the prepayment/deposit from my customer. I see the credit memo reduced accounts receivable, but shouldn't the money be landing in undeposited funds account? I'm missing a step (or 2). The day I get the check, the money will go into my one bank account, so I am not sure how to take it from the credit memo to the deposit and link them all together, without counting the deposit as a sale, until the final payment is made.

I looked at a statement and the one that applies to us is listed below. We are on accrual method. IF, if the deposit is refundable, it is a liability until the job/sale is invoiced. Problem is, once the customer first paid based on the estimate, I moved it to an invoice. I don’t want to pay for taxes until the final payment is made, since I do not work on it until then. Sometimes, customers will take 6-8 months to pay on an item.