Accounting for Retainers

You should not enter this on a sales form of any sort. You did not sell anything. The easiest thing to do is to treat the payment as a payment and enter it normally. Optionally enter something like "Retainer" on the memo field.

Then enter a journal entry crediting The customer retainer account, include the customer's name in the name field so it will show up on reports related to the customer. Debit the accounts receivable for the customer. The memo fields can state something like "Amount applied to retainer account". This is what will show up on the customer's statement to explain the transactions.

If you wish to provide a written record for the customer, print a statement which will show a zero balance if the above two transactions are for the same amount. That way, the customer will not see a credit balance in the future until you are ready to release some or all of his retainer against his billables.

(my name is Craig, too)

Thank you for the suggestions. I don't think this will accomplish the goal however:

1. Our customers require an "invoice" in order to make a payment. I know that it is not a sale on our end, however we are asking them for money and they consider that an "invoice" requirement on their end. I could issue them a fake invoice, but that does not seem to be good accounting policy to begin issuing accounting documents "on the side".

1. What about the application of the deposit against future invoices? I need to issue future invoices for work actually completed with a deduction for deposits already paid. If we do ,000 worth of work and they have a ,000 retainer on hand with us, I need to issue a net ,000 invoice to them. In order to properly show everything, that invoice needs to show the ,000 sale and the ,000 negative retainer.

2. I have run into problems making journal entries to accounts receivable (or payable) accounts. That seems the recipe for mismatched reports and balances.

I appreciate your help, and am not trying to be difficult. It is just that I have been looking for a good way to handle this for about the past year on and off. I have tried what seems like everything, but no matter what I try, not a single method has worked without some kind of downside on the reporting end.

If I could find some kind of item to enter that would show up on an invoice, but not be counted as a "sale" I think I could get it to work.

I agree with your concept. I have a client who uses your method and has the same issues.

Until you get a better answer: Filter your sales reports to include all items EXCEPT the Retainer. Memorize the customized reports for repeated use.

liability for

really a

I'VE GOT IT!!! FINALLY!!

Here is what I have to do. Complicated, but it seems to work EVERY way:

1. Record the invoice for the deposit to be given to the customer. The item to use is Deposits, and it posts to an income statement account called Deposits. (This will create revenue.) A/R ,000 Deposits Income ,000

1. Record a Credit Memo for the deposit amount. This is an internal document only. (This will remove the ,000 from revenue.) Deposits Income ,000 A/R ,000

2. Record an AJE for the deposit amount to create the receivable again that was eliminated in step 2, and to also create the Retainers Payable balance sheet account. Be sure to record the customer name on the AJE. A/R-Customer Name ,000 Retainers Payable (Liability account) ,000

1. To clean things up at this point, you could receive a zero amount against the credit memo for that customer to net the credit memo against the AJE.

2. Record the eventual receipt as normal against your invoice created in step 1.

1. When you have done the actual work and wish to net the deposit, just record your invoice as normal (Sales or whatever). Include on that invoice a line to the Deposits item with a negative amount. A/R ,000 Sales Income ,000 Deposits Income ,000

2. Record an invoice to remove the ,000 deposit from revenue. This is the opposite of step 2 above. An internal document only again. A/R ,000 Deposits Income ,000

1. Record an AJE to move the deposit out of the Retainers Payable (Liability account) and reduce the A/R balance for that amount. This is the opposite of step 3 above. Retainers Payable Liability ,000 A/R-Customer Name ,000

2. To clean things up at this point again, you could repeat step 4 to net the AJE against the internal invoice.

1. Receive your customer payment as usual against the invoice.

If there is an easier way, I don't know, but I think this works.

What version of QB do you have?

If you have one of the versions that allow for estimates, you might try customizing the estimate template to a 'deposit request' form (you can call it an invoice if your customers insist, but mine did not). Create a job for the customer, say, 2004 retainage, then create the estimate under the specific job. Since estimates are non-posting, there is no record of 'sale' when you do this.

While I don't have the stomach to grock your lengthy procedure, I just thought I'd plant the seed of using a sales order (or an estimate) to "invoice" the customer before recording the payment. As non-posting, it would not affect any account. That might cut out some of your copmplicated procedure. Once the payment is received, you could inactivate the sales order. Then, no journal entries would be necessary. Your invoice for actual work could be issued and a statement from which to pay could accompany it. If the Invoice was for

20K for instance, The statement would show the Payment recieved as a 10K credit, The 20k Invoice as a 20K Debit, and at the bottom of the statement would be the words "Please Pay this amount ==> 10,000.00."

In this scenario (different from the Law firm type I described before) the payment would never leave accounts receiveable and you would not need a retainer account. If you truely want to show the balance as a liability (retainers or deposits) instead of a credit to Receivables, then a Journal entry is recommended since the purpose of the transaction is entirely internal to your company.

Craig

We are using 2005 Premier Contractors Edition.

The idea of an Estimate is interesting and seems like it may work. Our issue just becomes the paper trail between us and our clients, especially when it comes time to apply that deposit against a future invoice.

I wanted to contribute to this newsgroup what I could. Even if you don't go through and review this entire lengthy procedure now, at least print it out for future reference. You never know when it may be needed. That is exactly what I am going to do, and then it will leave more room in my mind to ponder other things.

I also couldn't make it to the bottom of the lengthy procedure described, but how's this for a revised procedure:

Step 1: set up a Liability account named something like Retainers or Customer Deposits or Prepaid Consulting Fees, etc. Step 2: set up an Item named Retainers and set the the related account the liability account created in Step 1 Step 3: issue an invoice to the customer for whatever amount of retainer you need to collect, this gives them an invoice to pay for their own AP purposes Step 4: Receive the customer payment against the retainer invoice just like any other customer receipt Step 5: track time as normal (if you normally do this) to carry to an invoice Step 6: create an invoice using the time tracked in Step 5 or by whatever method you normally create an invoice Step 6a: create a line item in the invoice using the "Retainer" Item set up in Step 2. You must enter the invoice amount for this line as a negative amount (amount should not exceed the amount of current charges you're charging the customer for).

Notes: After Step 3: you've created a customer receiveable but no income and a liability for services owed to the customer After Step 4: you have cash in the bank (or undeposited funds), you have no more receivable but you still have the liability for services owed to the customer After Step 6: you'll issue an invoice only for net amount of current charges due, you have recorded income appropriately and removed the liabilty account (assuming invoice total was more than the retainer). If current invoice charges are not more than the retainer, then the invoice total is zero and the liability account from Step 1 is adjusted downward to reflect services provided. Remember, you should enter a negative amount large enough to make entire invoice negative unless you're planning to issue a refund to the customer.

Pretty straight forward and it actually follows the correct accounting for the advance payment and recording of income. One caveat, if you are a cash-basis taxpayer, the amount of the Retainers liability account at the end of the year will need to be ADDED to your net income shown on the P&L for tax return purposes. The above walk-through assumes you're an accrual basis taxpayer. This distinction is necssary because a cash-basis taxpayer records income when the cash is received, not necessarily when the services are rendered.