What happens to a customer deposit once an order is filled?

When a customer deposit is placed, it is recorded as a liability on the balance sheet because it represents an obligation to provide goods or services to the customer in the future. Once the order is filled and goods are delivered or services rendered, the deposit is then applied against the invoice. This action signifies that the liability is being settled as the customer is being charged for the goods or services provided.

The application of the deposit reduces the total amount due on the invoice, reflecting that the business has fulfilled its obligation to the customer. This process effectively transforms the liability into recognized revenue.

In contrast, other options do not accurately describe the process that occurs once an order is filled. For example, leaving the deposit as a liability indefinitely does not reflect the completion of the transaction, while canceling the deposit entirely ignores the accurate tracking of customer payments and obligations. Converting the deposit to a cash asset without applying it against the invoice would also misrepresent the nature of the transaction in financial reporting.