Contractor Retention

Hello there, @akraemer.

You can set up your retention in your QuickBook Desktop (QBDT) account so the retention is automatically applied when necessary. By doing this, the retention then remains as an asset until it's paid in full. 

To set up a retention account so you can save time and the calculations that it requires to figure out retention for each job. Here's what you'll need to do:

1. Go to the Lists menu at the top and click Chart of Accounts.
2. From the Account ▼dropdown, select New.
3. Select an account type, then click Other Current Liability. 
4. Next to the Retainage Receivable option, enter the percentage of retention you'd like to apply and click OK.

Then, to set up the retention item that will appear in the invoice, see the below steps:

1. Go to the Lists menu at the top.
2. Select Item List.
3. Open a new item by pressing Ctrl+N and then clicking Other Charge.
4. Name the charge Retainage Receivable.
5. Click the drop-down menu to select the retention amount that you set up.
6. Clear the check box beside the reimbursable charge option and click OK.

After that, create a new invoice for a client to whom retention applies. You can now enter the payable amount and then enter the Retention Receivable as of the option on the next line. Doing so, the system will automatically deduct the retention from the amount due for the invoice. 

To check what is still outstanding for clients using retention, you can check your retainage receivable report by clicking the Lists menu at the top and then Chart of Accounts. Then, double-click Retainage Receivable. 

 Additionally, before doing the steps above, I suggest consulting an accountant. Your accountant can help guide you through how to handle this kind of situation.

If you need help with processes and other tasks in QBDT in the future, visit our Community website. It contains helpful information and guides that'll point you in the right direction. 

If you have any other questions when using QuickBooks, click the Reply option below. I'll be here to help. Take care always!

@akraemer 

It sounds like you're the party paying the retainage to the contractor, correct?

If so, debit the expense and credit A/P when holding the retainage.  When paying it, debit A/P, credit the bank account.

No, we are receiving the retainage. 

@MirriamM I appreciate your response! We don't have the option to pick Retainage Receivable or add a percentage.

We are using QB Enterprise Solutions Contractor 20.0

@akraemer 

Retainage Receivable should be an Accounts Receivable (A/R) asset account, not a liability account as your screenshot shows.  You can receive the retainage on an invoice if it is assigned to an A/R account.

I was initially confused because you mentioned A/P which would imply you are paying the retainage, not receiving it. 

I am just as confused  as you are. LOL She is going off what the CPA told her, but it doesn't sound correct to me. I am just trying to get it set up to be able to hold out retention and then receive to it once we are paid for it. 

@akraemer 

The confusion is using A/P and not A/R.  Set up the retainage receivable as A/R and everything will work fine.

Thank you!

How can I write a contract with a customer 

I have set up the various "other asset" accounts for retention.  Everything is running smoothly.  We invoice the retention to the client when the job was finished and paid.  The retention report shows the payment.

Now the problem.  Retention received is income.  The payment received is not showing as income on the P&L. 

How do I have the retention payment that was received, show as income on the P&L and also have it reduce the "other asset" retention account?

Bill

It's great having you in this thread, Bill Mc1. 

I'll share insights to ensure these retainers will show as income on your Profit and Loss. 

Since you've set up retentions under the other asset accounts, these won't show up on your profit and loss as these are liability accounts. With that said, let's set up these retainers under the Other Current Liability type of account. Then, we'll create an invoice to mark these retention payments as income.

I'll share detailed steps to guide you in setting up retainers as liability accounts. Here's how:

1. From the Lists menu, select Chart of Accounts.
2. In the Chart of Accounts window, right-click and click New from the pop-up menu.
3. Select Other Current Liability as the account Type.
4. Enter a name for the account (for example, Upfront Deposit) in the Name field.
5. Select Ok.

Once done, you'll need to create an item to use when recording upfront deposit items or retainers.

Here's how to create an upfront deposit item:

1. From the Lists menu, select Item List.
2. In the Item List window, right-click and select New from the pop-up menu.
3. From the Type drop-down menu, click the purpose of the deposits you collect.
4. You can select Service if you collect upfront deposits for services or Other Charge if you collect upfront deposits for products.
5. Enter a name for the item (for example Upfront Deposit) in the Item Name/Number field.
6. Select the Upfront Deposit liability account you created from the Account drop-down list.
7. Select Ok.

Also, let's create an invoice once you've received a retainer for a product or service.

1. From the Customers menu, select Create Invoices.
2. From the Customer: Job drop-down list, select the customer or job.
3. Enter relevant information such as the Date, Invoice #, Bill to/Sold to, and Terms in the appropriate fields on the form.
4. In the Detail section, select the items (products or services) to include in the sale.
5. Select Save and close.

For more detailed information on the provided, refer to this article: Manage upfront deposits or retainers.

Moreover, you can check out these references to help you review your business finances and other data:

• Understand reports.
• Customize reports in QuickBooks Desktop.

We'll always be around if you require further assistance managing retentions in QuickBooks. Keep safe, and have a good one!

Thank you for the response.  I am a little confused in that we are talking about Retention not Retainage.

Retention is what companies owe us (other asset) and Retainage is what we owe companies (other liability).  Why are you wanting me to set up a Retainage (other liability) account for Retention?  We never ask a client for a retainer so we have no deposits that are used for retainers.

You noted at the beginning that having a (other asset) account for Retention will not show in profit and loss.  Hence my question.

Bill

Hello there, Bill Mc. 

Let me share additional information and get things cleared out for you.

In QuickBooks, retentions that are associated with the other asset category account won't show as an income in the Profit and Loss because these are in the asset type of account.

If you want to show these retentions as income on the Profit and Loss, I'd suggest consulting an accountant professional. This way, they'll help you guide whether these are on the correct accounts and would make your financial records accurately balanced.

Moreover, I'm adding these articles to guide you with other QuickBooks tasks: 

• QuickBooks Desktop Help articles.
• QuickBooks Online Help articles.

If you require any additional assistance managing your accounts, you can always reply in the comments below. We'd gladly help you further. Take care!

Thank you for your response.  I have been reading that QBO doesn't handle Retention very well.  I was hoping that they were wrong. 

What word work, is that if we had just a line adjustment for an account.  QBO Accountant should be able to do that, but it doesn't.  QB Desktop does but not QBO. 

My workaround:  Currently, I use a jrnl entry.  It shows the income on the P&L and then I dump the other side of the jrnl to "ask the account", which screws up the P&L totals at the bottom.  To continue the workaround, we then export to a spreadsheet and fix it manually. 

Hopefully in the future QBO will fix this problem.

Bill

@Bill Mc1 

How do I have the retention payment that was received, show as income on the P&L and also have it reduce the "other asset" retention account?

Retention income (credit) should have been booked when you invoiced the customer and assigned it to the Retention Other Current Asset (debit).  When you receive payment, deposit it to your bank account (debit) and assign the Retention Other Current Asset to it (credit).  That will increase your bank account and zero out the other current asset account.  It's easier to record the retention as A/R (instead of an other current asset) by using an invoice and then receiving payment as you would with any other invoice but that's up to you.

Hello,

I have also been trying to figure out how to record the Income that is deducted by the Retainage Item (Other Asset).  No one seems to understand that by using the Other Asset account for Retainage, Income is not being recorded for the Retainage Amount.  What is your Journal Entry to Record the Retainage when received?  We have to Invoice for the Retainage and then the balance is brought back to $0.00 when the Invoice is paid.  Still missing recording the Income. For Job Costing, Desktop is clearly the superior QB product.

Where is the Retainage being recorded as Income?

@dward1 

"No one seems to understand that by using the Other Asset account for Retainage, Income is not being recorded for the Retainage Amount. What is your Journal Entry to Record the Retainage when received?"

The income is being recorded when the invoice is issued or the journal entry is created.  The retainage is reducing A/R, it is separate from income.  For example, if you enter an invoice for $100K in income items with a $10K retainage, the retainage is entered on the invoice as a negative amount using a Retainage item.  That negative amount reduces A/R, not the income.  The journal entry created by the invoice looks something like this:

Then, when you receive payment on the retainage, create a deposit and assign the Retainage (Other current asset) account to the deposit.  That will reduce the retainage asset and increase your cash.  The journal entry created by the deposit looks like this (assuming you receive the entire retainage):

@Rainflurry 

Thank you for this explanation; however, I need some further guidance.  

1) As soon as you  Debit Retention (Other Current Asset), it posts the amount to Sales. Even though we have not received payment, and won't for some time.  So, that 10,000 DB you show in your first record above hits our sales, even on Cash Basis P&L. That's a problem.

2) We have an additional step in the process. We have an AR account called Retention AR.  After we deduct the Retention item on the initial invoice (the10,000 in your example), we create a new invoice to Retention AR for the 10,000 we will collect at a later date.  That date can be over a year after original invoice date.  The Retention Receivable (Other Current Asset) account acts as a clearing house so to speak, with 0 balance (as long as we accurately issue the main invoice and the Retention invoice).  So, now we have regular AR of 90,000, and Retention AR of 10,000, together accurately reflecting the 100,000 due to us from the customer. All good, except for #1 above and ...

3) When we receive payment for the  retention, e.g.,$10,000, it does not post to sales. That's actually a good thing since it posted back when we created the invoice.  But still, the timing of receipts is all wrong for tax purposes (since most of our retention is far enough out to end up in a different tax year).

I read in a blog that there is a journal entry to correct for this... but I can't seem to work it out.  Any thoughts on this?  

Thanks!

@dward1

On a cash-basis, the Retainage is posting to income (under sales in the P&L).  This is because of a shortcoming  of QB. This is the simple video showing this issue: https://www.youtube.com/watch?v=PUBGl5Sc-xk

This does not affect accrual basis.

@MelTilk 

"So, that 10,000 DB you show in your first record above hits our sales, even on Cash Basis P&L. That's a problem."

Yep, it's an issue.  My journal entry above was not a solution, it's just to show what QB is doing behind the scenes so you can see why $100K is posting to income.  QB has major shortcomings for handling retention as you're aware.  QB can only accurately switch between cash and accrual basis using the default A/R account.  As soon as you post a negative amount on an invoice to a different asset account like Retention Receivable, QB is no longer capable of accurately reporting cash basis income.  If you put retention on a separate invoice, that would do the trick. 

The video you posted in a different thread is good but has some issues.  He starts out by being confused as to why QB defaults to assigning an income account to the Retention Receivable item.  Well, there's a reason for that IMO.  If you select an income account for the Retainage Receivable item then QB will, in fact, accurately report cash basis income when you put the Retention Receivable item on an invoice because it posts the retention as a reduction in income (debit) instead of an OCA (debit).  The issue of course is that it looks strange on your P&L.  But it will work to accurately report cash basis income with retention.  Outstanding retention will show as negative income on your P&L instead of an OCA account on your balance sheet.