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Quality Support Solutions for Small Businesses & Entrepreneurs
Handling Prepayments Held for the Long-Term
Many businesses collect up-front fees (or retainers) from their clients to be applied against future billings. In
accounting terminology, these collected items are liabilities to the company that receives them until the income is
actually earned: You must complete the work or return the money. The following procedures demonstrate how to use
QuickBooks to track and record this process.
Tracking as a Liability instead of as Income
Simply receiving these prepayments as a customer credit (overpayment) in your Accounts Receivable creates the
possibility of having a negative AR balance (when money prepaid by customers exceeds money owed from
customers), making it difficulty to manage. Tracking these prepayments as a Liability (a Balance Sheet account)
allows you to see the amounts across a year-end and allows you to run reports by customer on the backlog of work
to be performed. An Income account does not carry forward in this manner. However, for cash-basis tax purposes,
the total of this tax year’s activity of this liability account may be considered as an adjustment (addition or reduction)
to income. Consult your tax advisor for specific information and to confirm the method you choose meets with your
needs.
Setting up your company file
To record transactions that collect and apply retainers, create a liability account and several new items (if they do not
already exist):
1. From the Chart of Accounts, create an Other Current Liability account and call it Unearned Revenue or
something similar.
2. From the Item list, create (or confirm that you have) the following items:
Item Type
Other Charge
Description
Retainer (received and held on account)
Account
Unearned Revenue (Liability)
Other Charge
Retainer applied (to pay account balance)
Unearned Revenue (Liability)
(you would only need this second item if the wording needs to be specific as to its use,
as will be seen once you’ve reviewed the process outlined below)
Payment
Payment
Undeposited Funds)
Subtotal
Subtotal (of charges above)
None: used for calculations only
(the use of subtotal is optional and will depend on your sales process)
Deposits to checking (or
Collecting the Retainer
You need a Sales transaction to process the receipt of the retainer amount: one part of the transaction posts the
money for the bank account and the other posts the amount to the liability account. When you first collect the
retainer, use one of the following methods:
1. Create a Sales Receipt using the “Retainer” item and enter the amount received. You could customize a template
so the title reads “Retainer Receipt.”
2. Enter a Statement Charge in the customer’s A/R register for the “Retainer” item and the amount received. Then
use Receive Payment to process the payment.
3. Create an invoice with a zero balance by using two line items:
a) On the first line of the invoice, use the “Retainer” item with the positive amount of the retainer. This line will
increase your liability in the Unearned Revenue account.
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10 Lupine Court
Elgin, SC 29045
(803) 272-8870
Quality Support Solutions for Small Businesses & Entrepreneurs
b) On the second line, use the Payment item, entering the amount received as a negative amount that creates
the “zero balance due” invoice and increases your bank account (or enters this amount in your Undeposited
Funds account for deposit later). Since this method creates a zero balance due, it is helpful to use the Memo
field of the invoice to type a note, such as “$5,000 retainer rec’d” and this text will show in the customer’s A/R
register as well as print on statements that include this invoice.
Showing Income Earned (by Applying the Retainer)
When the Retainer will be used instead of a payment from the customer, there are two ways to apply the Retainer
(client credit) to their charges. You can use it as a credit on an invoice (partially or fully) or you can apply it to the
customer’s Accounts Receivable register:
1. Apply to (one or more) invoice: Create an invoice as usual for the earned income (fees, labor, items, etc). If you
have more than one line item, it is nice to show the customer the total amount due, so, on the next line of the
invoice, below the details, use the Subtotal item. This will be a positive figure. On the next line, below the
Subtotal (or leave a blank line in between, for clarity) use the “Retainer” item (or the specific “Retainer applied”
item if you created both). Enter it as a negative number (up to the amount of the total balance due but not more
than the retainer on hand). This reduces the retainer amount in the Unearned Revenue liability account for this
customer and zeroes out (or reduces) this invoice.
2. Apply to customer’s account receivable: If there are multiple charges (you use Statement charges or have
multiple outstanding invoices for this customer) then use a Statement charge. In their A/R register, enter a line
item using the “Retainer” item (or the specific “Retainer applied” item if you created both). Enter it as a negative
to indicate this credit is a form of payment (up to the amount of the total balance due but not more than the
retainer on hand). Then use the Receive Payment window for this customer, leave the amount of payment at
zero (because you aren’t actually receiving payment here), and click on “Discounts & Credits” to apply (crosspost) the retainer credit to outstanding charges.
Either of these methods may leave an amount due from the customer –or– a balance due to the customer. To return
the balance due to the customer, write a check using the Unearned Revenue liability account as the account on the
“expense” tab. You would also write a check in this manner if the entire balance were to be returned to the customer,
such as when a project is canceled before beginning work.
Managing the Liability Account
The Unearned Revenue liability account contains a running total of all client retainers. One useful report is the
Transaction Detail by Account. In the report filters, select just the Retainer account, and then choose Total by
Customer and date = all. This report will give you a running total of how much you have received and have applied in
retainers. Memorize this report as “Retainers – All Transactions.”
When a customer’s balance equals zero in the liability account, you can reconcile this account for their entries. A
good routine is to do this after every billing cycle, perhaps once a month. You will likely always have a running
balance in this account, so don’t reconcile the whole account as if it is a bank account; leave the entries for other
customers uncleared for the other entries to be accurate. Only clear entries that bring a specific customer to zero
(these are viewed on the “Retainer – All Transactions” report). Now filter the retainer report for uncleared entries only
and memorize this report as “Retainers On Hand” to see your actual liability.
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