Record a retainer or deposit in QuickBooks Online

Learn how to record a retainer or deposit in QuickBooks Online.

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.

In this article, you'll learn how to:

• Create a liability account
• Create a retainer item
• Create a trust liability bank account
• Create sales receipt or invoice for deposits or retainers
• Turn retainers into credits on invoices
• Transfer funds from your trust liability account to your operating account
• Track deposits or retainers by customer
• Pay customer expenses with money held in the liability account

Step 1: Create a liability account

First, you need to create a liability account to track the amount of the retainers you receive from your customers.

1. Go to Settings , then select Chart of accounts (Take me there).
2. Select New.
3. From the Account Type ▼ dropdown menu, select Other Current Liabilities.
4. From the Detail Type ▼ dropdown menu, select Trust Accounts - Liabilities.
5. Enter a Name for the account (for example, Trust Liabilities) or accept the suggested name.
6. Select a Default Tax Code, enter an Unpaid balance, and an as of date.
7. Select Save and Close.

Step 2: Create a retainer item

1. Go to Settings , then select Products and Services.
2. Select New.
3. From the Product/Service information panel, select Service.
4. Enter a name for the new product or service item (for example, Retainer).
5. From the Income account ▼ dropdown menu, select the liability account created in Step 1.
6. 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 always needed)

Not everyone will need to complete Step 3. Follow this step if you keep the money from customer retainers and deposits in a separate trust account.

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

1. Go to Settings , then select Chart of accounts (Take me there).
2. Select New.
3. From the Account Type ▼ dropdown menu, select Bank.
4. From the Detail Type ▼ dropdown menu, select Trust account.
5. Enter a Name for the account (for example, Trust Liability Bank Account) or accept the suggested name.
6. Select a Default Tax Code, enter a Balance, and an as of date.
7. Select Save and Close.

Step 4: Create sales receipt or invoice 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 to invoice customers for deposits or retainers instead of receiving them directly, skip to Option 2.

Option 1: Create a sales receipt

1. Select + New.
2. Select Sales receipt.
3. Select the Customer name from the dropdown.
4. From the Deposit to ▼ dropdown menu, 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 and close.

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.

Option 2: Invoice customers for deposits or retainers

Instead of creating Sales receipts (Option 1), you can invoice customers. Here’s how.

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

1. Select + New.
2. Select Invoice.
3. Select the Customer name from the dropdown 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 and close.

Step 5: 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.

1. Create an invoice for your customer that lists the services or goods you've 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 6: 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.

1. Select + New.
2. Select Transfer.
3. From the Transfer Funds From ▼ dropdown menu, select your trust liability bank account.
4. From the Transfer Funds To ▼ dropdown menu, select your operating bank account.
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' 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. Go to Reports (Take me there).
2. Select Business overview.
3. Select Balance Sheet report. 
4. From the Report period ▼ dropdown menu, select All Dates. Then Run report.
5. In your liabilities section, locate your trust liability account.
6. Select the amount shown for the account to open the Transaction Report for that account.
7. From the Group by ▼ dropdown under Rows/Columns, select Customer.
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.

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. Go to Settings and select Account and settings.
2. Select Expenses.
3. In the Bills and expenses section, select the edit icon ✎.
4. Select the Track expenses and items by customer to turn it on.
5. Select Save, then 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 an item to track these expenses.

1. Go to Settings and select Products and Services.
2. Select New.
3. Select Non-inventory or Service.
4. Enter a Name that describes what the retainer is used for (for example, Medical expenses or Net settlement).
5. Clear the I sell this product/service to my customers checkbox.
6. From the Expense account ▼ dropdown menu, select the trust liability account you've created.
7. Select Save and close.

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

1. Select + New.
2. Select Expense.
3. Select your Payee ▼ from the dropdown menu. The payee can be a supplier, 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 Payment account from which to pay the expense. If you have a separate trust bank account, select it. Otherwise, select your main operating account.
5. Select the retainer entry that you just created, from the Product/Service ▼ dropdown under the Item details section.
6. Enter the Rate, Amount, or other details about the expense as required.
7. Select Save and close.

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