The short answer is simple: record a supplier deposit as a current asset, usually under “Prepayments and Deposits” or “Advances to Suppliers”. Do not record it as an expense or net it against trade payables.

When the goods arrive, transfer the deposit to inventory or the relevant expense account. Record any unpaid balance as a trade payable.

Whether you import goods from Shenzhen, export from Kwun Tong or operate a Hong Kong trading company without a local office, the basic accounting principle is the same. A supplier deposit represents your right to receive goods or services in the future. Your accounts should continue to show that asset until delivery takes place or the deposit is refunded.

Why Supplier Deposits Matter for Hong Kong Traders

Hong Kong’s total merchandise trade reached approximately HK$9,464.5 billion in 2024, an increase of 7.3% compared with the previous year.

The import and export trade industry recorded receipts of approximately HK$4,523.3 billion. The industry included about 69,300 companies and employed approximately 351,100 people.

Hong Kong also had around 357,000 SMEs at the end of 2024, representing approximately 98.5% of all business units.

Many of these businesses are small trading companies. One large supplier deposit can therefore have a significant effect on monthly cash flow, reported profit and the balance sheet.

If deposits are recorded incorrectly, your accounts may show:

• Expenses before goods have been received.
• Inventory balances that are too low.
• Trade payables that are understated.
• Profit figures that are inaccurate.
• Foreign exchange balances that are misstated.
• Old or unrecoverable deposits that remain hidden.

Accurate supplier deposit bookkeeping gives business owners a clearer view of cash committed to suppliers and goods that are still in transit.

What Counts as a Supplier Deposit?

Supplier-related deposits can take several forms. They should be labelled clearly in your accounting system because the correct treatment may differ depending on the contract.

Common examples include:

• Production deposits, such as 30% paid before manufacturing begins.
• Advance payments to secure scarce stock or a supply allocation.
• Prepaid freight, warehousing or customs-broker charges.
• Refundable security deposits paid to suppliers or logistics providers.
• Prepaid services connected with purchasing, shipping or storing goods.

A production deposit usually becomes part of the inventory cost when the goods are received. A refundable security deposit may remain a separate asset until it is returned.

Core Accounting Treatment

A supplier deposit is generally not an expense when it is paid because your business has not yet received the goods or service.

The usual accounting process has three stages.

Step 1: Pay the Supplier Deposit

When the deposit is paid, record an asset.

Debit: Prepayments and Deposits
Credit: Bank

This records the amount paid while showing that the business has an outstanding right to receive goods, services or a refund.

Step 2: Receive the Goods and Final Invoice

When the goods arrive and the supplier issues the final invoice, transfer the deposit to inventory.

Debit: Inventory
Credit: Prepayments and Deposits
Credit: Trade Payables

The credit to Prepayments and Deposits clears the deposit. The remaining balance becomes a trade payable.

Step 3: Pay the Outstanding Balance

When you pay the supplier’s remaining balance, record:

Debit: Trade Payables
Credit: Bank

The supplier payable is then cleared.

Worked Example: Hong Kong Supplier Deposit

The following is a hypothetical example for illustration only.

A Hong Kong trading company orders goods worth HK$500,000 and pays a 30% deposit before production begins.

Stage	Debit	Credit	Amount
Pay deposit	Prepayments and Deposits	Bank	HK$150,000
Goods received and final invoice issued	Inventory	Prepayments and Deposits	HK$150,000
Goods received and final invoice issued	Inventory	Trade Payables	HK$350,000
Pay outstanding balance	Trade Payables	Bank	HK$350,000

After the goods are received:

• Inventory shows HK$500,000.
• The deposit account has been cleared.
• Trade payables show HK$350,000.
• The bank has paid the full HK$500,000.

The deposit should not have been recorded as an expense when it was originally paid.

Where Supplier Deposits Sit in Your Chart of Accounts

A typical Hong Kong SME chart of accounts places supplier deposits under current assets and unpaid supplier invoices under current liabilities.

Account	Category	Typical use
Prepayments and Deposits	Current asset	Production deposits, prepaid freight and refundable deposits
Inventory	Current asset	Goods received, including the deposit portion
Trade Payables	Current liability	Supplier invoices that remain unpaid
Accrued Expenses	Current liability	Freight, handling or other costs incurred but not yet invoiced

Keep refundable deposits separate from deposits that will be applied against the cost of goods. This makes it easier to identify which amounts should eventually return to the business and which amounts will become inventory or expenses.

If delivery is not expected for more than 12 months, consider whether the balance should be shown as a non-current asset.

For long-term supply contracts, accounting standards may also require consideration of whether there is a financing element. This is less common for ordinary SME trading transactions, but it may be relevant where there is a long period between payment and delivery or a significant financing benefit.

Foreign Currency Supplier Deposits

Hong Kong importers and exporters commonly pay suppliers in US dollars, renminbi and euros. Foreign currency treatment should therefore be built into your monthly bookkeeping process.

The key distinction is whether the deposit will be returned in cash or used to receive goods or services.

Refundable Foreign Currency Deposits

A refundable deposit is generally a monetary item because it will be returned in a fixed amount of foreign currency.

It is normally retranslated at the closing exchange rate at each reporting date. Any resulting exchange difference is generally recorded in profit or loss.

Prepayments for Goods

A prepayment for goods is generally a non-monetary item. It is usually recorded using the exchange rate on the date the payment is made and is not retranslated subsequently.

Always record:

• The original currency.
• The foreign currency amount.
• The exchange rate used.
• The Hong Kong dollar equivalent.
• The payment date.
• The bank transaction reference.
• The supplier invoice or receipt.

The contract terms are important. A deposit that can be refunded in cash may be treated differently from an advance payment that can only be used against future goods.

For profits tax purposes, exchange differences arising from ordinary trading activities are generally treated differently from capital-related exchange differences. Review unusual or significant foreign currency balances with your adviser before finalising the accounts.

Record-Keeping and Tax Compliance

Hong Kong businesses must keep sufficient records to support their income and expenditure. Accounting and supporting records generally need to be retained for at least seven years.

For supplier deposits, retain the complete transaction file, including:

• Purchase orders.
• Signed supplier contracts.
• Pro forma invoices.
• Deposit requests and receipts.
• Bank transfer records.
• Payment dates and currency details.
• Bills of lading.
• Delivery notes.
• Customs and shipping documents.
• Goods received records.
• Final supplier invoices.
• Credit notes or refund confirmations.
• Emails relating to delays, cancellations or disputes.

These documents help demonstrate:

• Why the deposit was paid.
• When it was paid.
• Which supplier received it.
• Whether goods were eventually delivered.
• How the deposit was applied.
• Whether the amount remains recoverable.
• How the transaction relates to the trading business.

Well-organised records also make tax return preparation, year-end accounting and audit support much smoother.

You can learn more about Pinetree’s Hong Kong tax services for assistance with tax filing and supporting schedules.

Monthly Supplier Deposit Control Checklist

Review your supplier deposits every month.

• List every open deposit by supplier.
• Record the purchase order and payment date.
• Record the amount in the original currency and Hong Kong dollars.
• Add the expected delivery date.
• Confirm whether the deposit is refundable or non-refundable.
• Reconcile the deposit ledger to your supplier schedule.
• Match goods received notes to outstanding deposits.
• Check whether a final invoice has been received.
• Chase overdue goods, credits or refunds.
• Review deposits outstanding for more than 12 months.
• Reassess whether old deposits remain recoverable.
• Review foreign currency deposits using the correct accounting treatment.
• Confirm that deposits have not been accidentally netted against payables.

A supplier deposit schedule should be reconciled to the general ledger at each month-end and year-end.

Common Supplier Deposit Bookkeeping Mistakes

Mistake	Why it causes problems	Correct approach
Expensing the deposit immediately	Profit is understated before goods are received	Record the amount as a prepayment or deposit
Netting deposits against payables	Cash committed to suppliers is hidden	Show the asset and liability separately
Failing to maintain a deposit schedule	Old deposits and missing refunds go unnoticed	Track every deposit by supplier and purchase order
Ignoring foreign currency	Asset balances and exchange differences may be wrong	Record currency, exchange rate and reporting treatment
Missing supporting documents	Tax and audit evidence is weakened	Keep contracts, bank records and shipping documents
Leaving unrecoverable deposits on the books	Assets and profit may be overstated	Review recoverability and make an appropriate adjustment
Recording inventory before delivery	Stock and cost of sales may be misstated	Recognise inventory when control or delivery conditions are met
Paying the final invoice without checking the deposit	The supplier may be paid twice	Match the final invoice to the deposit schedule first

What Happens When a Supplier Fails to Deliver?

If a supplier fails to deliver, the deposit remains an asset only while recovery is realistic.

Start by reviewing:

• The supplier contract.
• Cancellation and refund clauses.
• Emails and messages.
• Delivery deadlines.
• Credit notes.
• Legal correspondence.
• Bank payment evidence.
• The supplier’s current financial position.

If recovery becomes doubtful, consider whether an allowance, provision or write-off is appropriate under the applicable accounting framework.

Do not remove the balance without documentation. Keep evidence showing what happened and why management concluded that the deposit was no longer recoverable.

The tax treatment of a write-off may not automatically follow the accounting treatment. Discuss the position with your tax adviser before submitting the relevant profits tax return.

Should Deposits Be Offset Against Trade Payables?

Generally, supplier deposits and trade payables should be shown separately.

For example, suppose your business has:

• HK$200,000 of supplier deposits.
• HK$150,000 owed to suppliers.

Showing only a net balance of HK$50,000 hides the amount of cash tied up in deposits and makes supplier exposure more difficult to understand.

Separate presentation provides a clearer picture of:

• Advance payments.
• Outstanding supplier invoices.
• Cash committed to future purchases.
• Amounts potentially at risk.
• Working capital requirements.

How Pinetree Can Help

Supplier deposits are straightforward in principle but can become difficult to control when your business is managing overseas suppliers, multiple currencies, shipments and changing inventory.

Pinetree supports Hong Kong SMEs, start-ups and overseas-owned companies with:

• Accounting and bookkeeping services, including supplier deposit schedules, accounts payable control and monthly management reports.
• Audit arrangement and support, including help preparing deposit reconciliations and supporting documents for the appointed auditor. Pinetree does not perform statutory audits itself.
• Tax services based on properly supported accounting records.
• Company formation for overseas entrepreneurs establishing a Hong Kong trading company.
• Company secretary services for statutory filings and company records.
• Payroll and HR outsourcing as your import-export team grows.

Frequently Asked Questions

Is a Supplier Deposit an Expense in Hong Kong?

No. A supplier deposit is generally recorded as a current asset until the goods or services are received, or the deposit is refunded.

Once goods are received, the deposit normally becomes part of inventory or the related cost. If the deposit relates to services, it may become an expense as the service is delivered.

Do I Need to Record Deposits Paid to Overseas Suppliers?

Yes. Hong Kong record-keeping requirements apply to your business regardless of where the supplier is located.

Keep the supplier contract, purchase order, bank transfer evidence, invoice, shipping documents and final settlement records.

How Long Should I Keep Supplier Deposit Records?

Accounting and supporting records generally need to be kept for at least seven years.

Keep the full transaction file rather than only the bank payment record. The contract, supplier invoice and shipping documents may be needed to support the accounting and tax treatment.

Should Supplier Deposits Be Shown Separately from Trade Payables?

Yes. A supplier deposit is an asset, while an unpaid supplier invoice is a liability.

Showing them separately provides a clearer view of cash committed to suppliers and amounts still owed.

How Should I Record a US Dollar Supplier Deposit?

Record the original US dollar amount, the exchange rate used and the Hong Kong dollar equivalent.

Refundable deposits are generally treated as monetary items and retranslated at the reporting date. Prepayments for goods are generally treated as non-monetary items and usually remain at the exchange rate used on the payment date.

Is Interest on a Bank Deposit Taxable in Hong Kong?

Interest received by non-financial businesses on deposits with authorised institutions in Hong Kong is generally exempt from profits tax. This is separate from the tax treatment of your trading profits.

The treatment can depend on the nature of the recipient, the account and the wider circumstances. Obtain advice where the interest is material or the business has unusual financing arrangements.

Speak to Our Hong Kong Team

If you want your supplier deposits, inventory, payables and year-end accounts set up properly, contact Pinetree for a friendly, no-obligation conversation.

We can review your current process and suggest practical next steps for your Hong Kong import-export business.