[3 min read]
One of our clients is a very good payer.
In fairness, all of our clients are—but this one now has a particularly good story attached to its payment record.
When the business started trading around 15 years ago, one of its suppliers asked for a refundable security deposit before agreeing to offer credit.
If you have not come across this arrangement before, the deposit gives the supplier some protection while the new customer builds a payment history. The supplier holds the money in case the business fails to pay for future purchases.
The deposit was not a purchase
The important accounting point is that a refundable deposit is not the same as buying goods or services.
It is not an ordinary expense. The money still belongs to the business, even though another organisation is holding it.
It should therefore normally be recorded as an asset on the balance sheet, where it remains visible until it is returned or validly applied against an amount owed.
That did not happen in this case. The original payment appears to have been recorded as though it were a purchase. It was therefore absorbed into the business’s expenses for that year instead of remaining visible on the balance sheet as money to be recovered.
Over the following 15 years, it also faded from the business’s memory.
The supplier had the record
Fortunately, the supplier acted in good faith—and its records were good enough to identify the old balance.
They recently contacted the business to explain that the security deposit was no longer required. Our client had established an excellent payment history, so the supplier wanted to return the money.
That came as a complete surprise. Because the deposit was not sitting on the balance sheet, we had no reason to know that the supplier was holding money that belonged to the business.
The refund is very welcome. But relying on the other party to remember is not a dependable financial control.
Bookkeeping preserves the story
The first lesson here is that bookkeeping should preserve the complete financial story of a business—not only what it has earned and spent, but also what it owns, what it owes and what other people owe to it.
Bookkeeping is a language. If a transaction is recorded in the wrong place, the story becomes incomplete. A recoverable balance can be absorbed into an expense and fall from view, making it less likely that anybody will follow it up.
If you are unsure how to record an unusual payment, ask your accountant or bookkeeper. The classification matters because it affects both the reports and the actions the business knows it needs to take.
A good payment record has commercial value
The second lesson is about paying suppliers well.
A reliable payment record strengthens relationships and credibility. It may help a business negotiate better prices, higher discounts or more favourable credit terms. Paying on credit can also support cash flow by allowing the business time to collect from customers before supplier bills fall due.
Being a good payer does not mean paying every invoice immediately or ignoring the needs of your own cash flow. It means paying within the terms agreed, planning for upcoming bills and communicating early if a problem arises.
Postponing a bill without a plan does not make it disappear. It can damage trust, add interest or charges and allow debt to accumulate.
Take-home tips
- Record refundable supplier deposits as balance-sheet assets rather than ordinary purchases or expenses.
- Keep the supporting agreement or correspondence, and review old deposits, retentions and other long-term balances periodically.
- Pay suppliers reliably within agreed terms, supported by cash-flow planning and early communication when circumstances change.
So, two questions worth asking:
• Would your balance sheet show every deposit or balance another business is holding on your behalf?
• And what does your payment history tell your suppliers about your business?
