Accounting for Retainers

Discussion in 'Quickbooks' started by Craig K., Oct 11, 2005.

  1. Craig K.

    Craig K. Guest

    I have been a QB user for many years and am fairly proficient in it. I am
    having a problem however properly accounting for advance retainers received.
    We sometimes need to "invoice" our customers for an advance deposit. I know
    that this is not "revenue" since we have not yet earned it.

    I create an "invoice" for the retainer amount (say $10,000). The line item
    on the invoice is Retainers which is a service item, that goes to a
    short-term liability account called Retainers Payable. What I end up with
    at this point is a receivable for $10,000, and a corresponding liability for
    $10,000. My general ledger does not show anything on the revenue side for
    this transaction.

    The problem I have with this, is that when I want to print a sales by
    customer or item summary, that retainer is counted as a "sale" for that
    customer. If this were the only transaction on the books, it would look
    like I had a $10,000 sale to a customer, but my income statement would show
    nothing.

    On the other end of the transaction, when I later go to invoice the
    customer, I offset the total invoice amount with a negative entry to the
    retainers item. This has the effect of removing the retainer amount from my
    liability account, and recording the full amount of the revenue. There is
    the same problem however as on the receipt end: My general ledger is
    correct, however my sales by customer or item reports show the use of the
    retainer as a negative sale amount. This is not correct.

    In my opinion, I should always be able to match my total income on my P&L
    with the total sales by customer or item reports. If there are many
    customers who this effects, and many cross over from year to year, those
    reports will never match.

    It seems as if QB counts any entry on an invoice as a "sales" item, when in
    fact sometimes it is just the application of a retainer and not really a
    "sale".

    Any suggestions? Thanks in advance for any help!
     
    Craig K., Oct 11, 2005
    #1
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  2. Craig K.

    MacroMan Guest

    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)
     
    MacroMan, Oct 12, 2005
    #2
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  3. Craig K.

    Craig K. Guest

    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".

    2. 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 $20,000 worth of work and they have a
    $10,000 retainer on hand with us, I need to issue a net $10,000 invoice to
    them. In order to properly show everything, that invoice needs to show the
    $20,000 sale and the $10,000 negative retainer.

    3. 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.

    "MacroMan" <> wrote in message
    news:...
    >
    > 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)
    >
     
    Craig K., Oct 12, 2005
    #3
  4. Craig K.

    !-! Guest

    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.


    "Craig K." <> wrote in message
    news:89fc0$434c2a3b$42a6e5ba$...
    > I have been a QB user for many years and am fairly proficient in it.

    I am
    > having a problem however properly accounting for advance retainers

    received.
    > We sometimes need to "invoice" our customers for an advance deposit.

    I know
    > that this is not "revenue" since we have not yet earned it.
    >
    > I create an "invoice" for the retainer amount (say $10,000). The

    line item
    > on the invoice is Retainers which is a service item, that goes to a
    > short-term liability account called Retainers Payable. What I end

    up with
    > at this point is a receivable for $10,000, and a corresponding

    liability for
    > $10,000. My general ledger does not show anything on the revenue

    side for
    > this transaction.
    >
    > The problem I have with this, is that when I want to print a sales

    by
    > customer or item summary, that retainer is counted as a "sale" for

    that
    > customer. If this were the only transaction on the books, it would

    look
    > like I had a $10,000 sale to a customer, but my income statement

    would show
    > nothing.
    >
    > On the other end of the transaction, when I later go to invoice the
    > customer, I offset the total invoice amount with a negative entry to

    the
    > retainers item. This has the effect of removing the retainer amount

    from my
    > liability account, and recording the full amount of the revenue.

    There is
    > the same problem however as on the receipt end: My general ledger

    is
    > correct, however my sales by customer or item reports show the use

    of the
    > retainer as a negative sale amount. This is not correct.
    >
    > In my opinion, I should always be able to match my total income on

    my P&L
    > with the total sales by customer or item reports. If there are many
    > customers who this effects, and many cross over from year to year,

    those
    > reports will never match.
    >
    > It seems as if QB counts any entry on an invoice as a "sales" item,

    when in
    > fact sometimes it is just the application of a retainer and not

    really a
    > "sale".
    >
    > Any suggestions? Thanks in advance for any help!
    >
    >
     
    !-!, Oct 12, 2005
    #4
  5. Craig K.

    Craig K. Guest

    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 $10,000
    Deposits Income $10,000

    2. Record a Credit Memo for the deposit amount. This is an internal
    document only. (This will remove the $10,000 from revenue.)
    Deposits Income $10,000
    A/R $10,000

    3. 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 $10,000
    Retainers Payable (Liability account) $10,000

    4. 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.

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

    6. 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 $10,000
    Sales Income $20,000
    Deposits Income $10,000

    7. Record an invoice to remove the $10,000 deposit from revenue. This is
    the opposite of step 2 above. An internal document only again.
    A/R $10,000
    Deposits Income $10,000

    8. 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 $10,000
    A/R-Customer Name $10,000

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

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

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


    "!-!" <> wrote in message
    news:is93f.5036$...
    >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.
    >
    >
    > "Craig K." <> wrote in message
    > news:89fc0$434c2a3b$42a6e5ba$...
    >> I have been a QB user for many years and am fairly proficient in it.

    > I am
    >> having a problem however properly accounting for advance retainers

    > received.
    >> We sometimes need to "invoice" our customers for an advance deposit.

    > I know
    >> that this is not "revenue" since we have not yet earned it.
    >>
    >> I create an "invoice" for the retainer amount (say $10,000). The

    > line item
    >> on the invoice is Retainers which is a service item, that goes to a
    >> short-term liability account called Retainers Payable. What I end

    > up with
    >> at this point is a receivable for $10,000, and a corresponding

    > liability for
    >> $10,000. My general ledger does not show anything on the revenue

    > side for
    >> this transaction.
    >>
    >> The problem I have with this, is that when I want to print a sales

    > by
    >> customer or item summary, that retainer is counted as a "sale" for

    > that
    >> customer. If this were the only transaction on the books, it would

    > look
    >> like I had a $10,000 sale to a customer, but my income statement

    > would show
    >> nothing.
    >>
    >> On the other end of the transaction, when I later go to invoice the
    >> customer, I offset the total invoice amount with a negative entry to

    > the
    >> retainers item. This has the effect of removing the retainer amount

    > from my
    >> liability account, and recording the full amount of the revenue.

    > There is
    >> the same problem however as on the receipt end: My general ledger

    > is
    >> correct, however my sales by customer or item reports show the use

    > of the
    >> retainer as a negative sale amount. This is not correct.
    >>
    >> In my opinion, I should always be able to match my total income on

    > my P&L
    >> with the total sales by customer or item reports. If there are many
    >> customers who this effects, and many cross over from year to year,

    > those
    >> reports will never match.
    >>
    >> It seems as if QB counts any entry on an invoice as a "sales" item,

    > when in
    >> fact sometimes it is just the application of a retainer and not

    > really a
    >> "sale".
    >>
    >> Any suggestions? Thanks in advance for any help!
    >>
    >>

    >
    >
     
    Craig K., Oct 12, 2005
    #5
  6. Craig K.

    L Guest

    "Craig K." <> wrote in message
    news:dcc53$434d45c8$42a6e5ba$...
    > 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 $10,000
    > Deposits Income $10,000
    >
    > 2. Record a Credit Memo for the deposit amount. This is an internal
    > document only. (This will remove the $10,000 from revenue.)
    > Deposits Income $10,000
    > A/R $10,000
    >
    > 3. 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 $10,000
    > Retainers Payable (Liability account) $10,000
    >
    > 4. 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.
    >
    > 5. Record the eventual receipt as normal against your invoice created in
    > step 1.
    >
    > 6. 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 $10,000
    > Sales Income $20,000
    > Deposits Income $10,000
    >
    > 7. Record an invoice to remove the $10,000 deposit from revenue. This is
    > the opposite of step 2 above. An internal document only again.
    > A/R $10,000
    > Deposits Income $10,000
    >
    > 8. 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 $10,000
    > A/R-Customer Name $10,000
    >
    > 9. To clean things up at this point again, you could repeat step 4 to net
    > the AJE against the internal invoice.
    >
    > 10. 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.
     
    L, Oct 13, 2005
    #6
  7. Craig K.

    MacroMan Guest

    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
     
    MacroMan, Oct 13, 2005
    #7
  8. Craig K.

    Craig K. Guest

    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.


    "L" <> wrote in message
    news:pbw3f.4594$...
    > "Craig K." <> wrote in message
    > news:dcc53$434d45c8$42a6e5ba$...
    >> 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 $10,000
    >> Deposits Income $10,000
    >>
    >> 2. Record a Credit Memo for the deposit amount. This is an internal
    >> document only. (This will remove the $10,000 from revenue.)
    >> Deposits Income $10,000
    >> A/R $10,000
    >>
    >> 3. 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 $10,000
    >> Retainers Payable (Liability account) $10,000
    >>
    >> 4. 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.
    >>
    >> 5. Record the eventual receipt as normal against your invoice created in
    >> step 1.
    >>
    >> 6. 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 $10,000
    >> Sales Income $20,000
    >> Deposits Income $10,000
    >>
    >> 7. Record an invoice to remove the $10,000 deposit from revenue. This
    >> is the opposite of step 2 above. An internal document only again.
    >> A/R $10,000
    >> Deposits Income $10,000
    >>
    >> 8. 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 $10,000
    >> A/R-Customer Name $10,000
    >>
    >> 9. To clean things up at this point again, you could repeat step 4 to
    >> net the AJE against the internal invoice.
    >>
    >> 10. 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.
    >
     
    Craig K., Oct 14, 2005
    #8
  9. Craig K.

    Mark H Guest

    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.


    "MacroMan" <> wrote in message
    news:...
    > 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
    >
    >
     
    Mark H, Oct 19, 2005
    #9
  10. Craig K.

    Joyce B.

    Joined:
    Oct 1, 2012
    Messages:
    1
    thanks Macroman

    Thanks Macroman, your reply to Craig K. was very helpful to me. I finally got the hang of something that has been bugging me for years.
     
    Joyce B., Oct 1, 2012
    #10
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