Intuit

How to record a retainer or deposit

Some businesses receive retainers or deposits from customers before performing any services. When they invoice customers for services, those invoices are paid using the money from the deposits.

You can set up a deposit or retainer process for your company in QuickBooks Online. The retainer or deposit is treated as a liability to show that, although your business is holding the money from a deposit or retainer, it doesn't belong to you until it's used to pay for services. When you invoice the customer and receive payment against it, you'll turn that liability into income.

The steps in the following sections will guide you through:

  • Setting up the deposit or retainer process
  • Recording received deposits or retainers
  • Accepting deposits or retainers as income
  • Tracking customer deposits or retainers received
  • Paying customer expenses with retainers

Step 1: Create a liability account to track retainers

The first step in setting your company up to record retainers or deposits is to create a liability account to track the amount of the retainers you receive from your customers.

To create the necessary liability account:

  1. Select the Gear icon on the Toolbar.
  2. Under Your Company, select Chart of Accounts.
  3. Select New.
  4. In the Account dialog, from the Account Type drop-down list, select Other Current Liabilities.
  5. From the Detail Type drop-down, choose  Trust Accounts - Liabilities.
  6. Enter a name for the account (for example, Trust Liabilities) or accept the suggested name.
  7. Select Save and close.

Once you have created the account to track retainers or deposits, the next step is to create an item to use when accepting retainers or deposits.

Step 2: Create a retainer item

To receive deposits or retainers from your customers, you will need to create a retainer service item:

To create the service item:

  1. Select the Gear icon on the Toolbar.
  2. Under Lists, select Products and Services.
  3. Select New.
  4. From the Product/Service information panel, select Service.
  5. Enter a name for the new product or service item (for example, Retainer).
  6. From the Income Account drop-down list, select Trust Liability Account.
  7. Select Save and close.

The retainer item can now be selected when creating an invoice or sales receipt for a deposit or retainer payment.

Step 3: Create a trust liability bank account

Not everyone will need to complete step 3. If you keep the money from customer retainers and deposits in a separate trust account, you will need to  follow this step to set up a trust liability bank account in QuickBooks Online.

If you keep the money in your own operating account, this procedure is unnecessary. When in doubt, try to reflect your real-world situation as much as possible.

To create the trust liability bank account:

  1. Select the Gear icon on the Toolbar.
  2. Under Your Company, select Chart of Accounts.
  3. Select New.
  4. In the Account dialog, from the Account Type drop-down list, select Bank
    [conditional show_hide="show" ]Cash or Cash equivalents.
  5. From the Detail Type drop-down list, select [conditional show_hide="show" ]Client Trust Account.
  6. Enter a Name for the account (for example, Trust Liability Bank Account) or accept the suggested name.
  7. Select Save and close.

You can now use this account for retainers or deposits.

Step 4: Create Sales Receipts for deposits or retainers

Once you have set up the accounts and the retainer or deposit item, you can begin to create Sales Receipts for the deposits or retainers you receive.

If you prefer, you can invoice customers for deposits or retainers rather than receiving them directly. To do so, skip this step and go directly to Step 5.

To create a Sales Receipt for a deposit or retainer payment:

  1. Select the Plus icon (+) on the Toolbar.
  2. Under Customers, choose Sales Receipt.
  3. Select the Customer name from the drop-down list.
  4. From the Deposit to drop-down list, select the separate trust liability bank account you created, your main operating account, or the account this money will be kept in.
  5. In the Product/Service column, select the Retainer or Deposit item you set up.
  6. Enter the amount received for the retainer or deposit in the Rate or Amount column.
  7. Select Save.

In addition to adding the retainer or deposit amount to the specified bank account, this increases the amount in your liability account to show that the money isn't truly yours yet, and to avoid treating it as income until later.

Step 5: Invoice customers for deposits or retainers

Instead of creating Sales Receipts for the deposits or retainers you receive (Step 4), you can invoice customers for deposits or retainers rather than receiving them directly.

The steps to do so are similar to creating a Sales Receipt except that you won't select a Deposit To account until you receive payment against the invoice.

To create an invoice for a deposit or retainer:

  1. Select the Plus icon (+) on the Toolbar.
  2. Under Customers, select Invoice.
  3. Select the Customer name from the drop-down list.
  4. In the Product/Service column, select the Retainer or Deposit item you set up.
  5. Enter the amount received for the retainer or deposit in the Rate or Amount column.
  6. Select Save.

The invoice for the deposit or retainer amount is created.

Step 6: Turn retainers into credits on invoices

When you charge a customer for the services you perform for them, you can turn the retainer or deposit you previously received into credit on an invoice and receive it like a payment.

To credit a retainer or deposit on an invoice:

  1. Create an invoice for your customer that lists the services or goods you provided.
  2. On the last line of the invoice, in the Product/Service field, select the Retainer or Deposit item.
  3. Enter the retainer Amount as a negative to subtract it from the invoice.
    You cannot enter a retainer amount greater than the invoice total. An invoice can have a zero total, but not a negative one.
  4. Select Save and close.

This decreases the amount in your liability account and applies the credit to your customer's invoice, turning it into income. The money is now yours.

Step 7: Transfer funds from your trust liability account to your operating account

If you created a separate trust liability bank account to hold retainers or deposits, once you have turned the retainer into income, you can transfer that money to your operating bank account.

To transfer the retainer amount:

  1. Select the Plus icon (+) on the Toolbar.
  2. Under Other, select Transfer.
  3. In the Transfer window, select your trust liability bank account from the drop-down list in the Transfer Funds From,field.
  4. In the Transfer Funds To field, select your operating bank account from the drop-down list.
  5. Enter the amount that you just received as payment for the invoice.
  6. Select Save and close.

The money is recorded as having moved from the special trust account to your business's own operating account.

Track deposits or retainers by customer

You can track how much of a retainer or deposit you are holding for each customer from the Balance Sheet report.

To review retainers or deposits by customer on the Balance Sheet report:

  1. From the left menu, select Reports.
  2. Locate and select the Balance Sheet to open it.
  3. Select All Dates from the Report Period drop-down list and select Run report.
  4. In the Liabilities section, locate your trust liability account.
  5. Select the amount shown for the account to open the Transaction Report for that account.
  6. Select Customize.
  7. In the Customize report panel Rows/Columns section, select Customer from the Group by drop-down list.
  8. Select Run report.

You can now see each customer's retainer or deposit balance, as well as a record of transactions that have affected this balance.

To reduce the number of results to view, you can change the report period to display a narrower date range, or select the small triangle next to a customer's name to collapse their details.

Tip: Select the Save customization button to save the customized report and access it in the future from the Custom Reports tab.

Pay customer expenses with money held in the liability account

If your business pays for customer expenses using the money held in the liability account, you must create a special item to track these expenses, as they should not appear on your Profit and Loss report.

For example, if you are a law firm that received a settlement from a court on a client's behalf, and you pay for the client's medical expenses out of it, with the intention of passing the remainder to the client, you must hold the settlement and pay the expenses from a dedicated account to keep them separate from your business accounts.

To set up the necessary item, first verify that you have Track Expenses and Items by Customer enabled:

  1. Select the Gear icon on the Toolbar.
  2. Under Your Company, choose Account and Settings (or Company Settings).
  3. From the left menu, select Expenses.
  4. In the Bills and Expenses section, select the Track expenses and items by customer checkbox.
  5. Select Save.
  6. Select Done.

Expenses and items are now tracked by customer, enabling you to view transactions and their effect on the customer's retainer.

The next step is to create the item to track these expenses:

  1. Select the Gear icon on the Toolbar.
  2. Under Lists, select Products and Services.
  3. Select New.
  4. In the Product/Service information panel, select Non-inventory or Service.
  5. Enter a Name that describes what the retainer is used for (for example, Medical expenses or Net settlement).
  6. Clear the I sell this product/service to my customers checkbox.
  7. Select your trust liability account from the Expense Account drop-down list.
  8. Select Save and close.

The item for the retainer is created. The next step is to pay the customer's expenses:

  1. Select the Plus icon (+) on the Toolbar.
  2. Under Vendors, select Expense.
  3. Select the Payee from the drop-down list. The Payee can be a vendor, such as another company or business, or, if you are creating the expense to give all or part of the retainer to the customer (for example, to pass a net settlement to a client), select the customer as the Payee.
  4. Select the bank Account to pay the expense from. If you have a separate trust bank account, select it. Otherwise, select your main operating account.
  5. In the Item details section, enter details about the expense.
  6. Select Save.

The expense reduces your liability account and your chosen bank account without affecting any of your business expense accounts.

Now you know how to create, manage and track retainers.