Retainage reflected in Balance Sheet but now P&L income is overstated - help!

nphudson · ‎November 19, 2024

I have a cash-basis construction business. Our customers will hold a retainage amount from progress payments, to be paid to us upon completion of the job. (*Not to be confused with a prepaid retainer that a customer pays before work begins.)

I set up an Other Current Asset account called "Retainage Receivables" along with an Item, "RetRcv" (Retainage Receivables) that links to the "Retainage Receivables" current asset account. When I bill a customer for a progress payment, I then use a negative number for the Retainage Amount.

For example: Customer's charges are $10,000, retainage is shown as line item RetRcv for -$1,000. Net invoice amount = $9,000. The $1,000 retainage shows up on my Balance Sheet as a Current Asset (Retainage Receivables), since it is owed to us at a later date. Customer pays the net invoice amount of $9,000. However, my P&L shows Sales Income of $10,000, not the $9,000 that was actually paid. I don't understand this, since I am cash-basis. At the completion of the job, I will then invoice the customer for the RetRcv item, a positive number, for total retainage amount. This should then reflect as Sales Income at that later date and reduce the amount in the Retainage Receivables asset account.

I have read other older threads about this but can't seem to find resolution. Any help would be greatly appreciated. Questions:

1) Is there a better way to record retainage on an invoice so that both P&L and Balance Sheet are accurate?

2) Is there something I'm missing to be properly set up for cash basis? My QB preferences are set to cash, and my reports are set to cash.

Thanks in advance for any help!

SashaMC · ‎November 19, 2024

Good afternoon nphudson,

Thank you for connecting with the QuickBooks Community! For this issue, we recommend connecting with your accountant to see what would be the best resolution for your business. If you don't have an accountant there is no need to worry. We offer a ProAdvisor service where you can connect with an expert within your area, Many even offer a free consultation. Here's how:

Go to this Find my Accountant link.
In the Find an expert in section, choose what you're looking for, then use your search field to enter a City or ZIP code.
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Please let me know if you have any further questions or concerns! My team and I will be here to help. See you around.

Rainflurry · ‎November 20, 2024

@nphudson

The issue is with how QB is designed. QB does not handle items linked to balance sheet accounts on cash basis as you might expect. To produce accurate cash basis reports, QB is designed to remove A/R from your balance sheet along with the corresponding income from the invoice. However, since you created the RetRcv OCA and reduced the invoice by that amount, you're bypassing A/R and QB cannot remove it so QB records $10K in income to keep your balance sheet balanced. If you think about it, on cash basis, after the payment is received, you've booked $9K in cash from the payment received and still have $1K in Retainage Receivable. Therefore your balance sheet must show $10K in income (equity) to keep your balance sheet balanced (assets = liabilities + equity).

The options are to keep using your existing process and just understand that your revenue is overstated by the amount in Retainage Receivable (this makes sense because if you see a receivable on a cash basis balance sheet, your revenue is overstated by that amount). Or, you can map the RetRcv item to an income account instead of an OCA. That tracks accurate cash basis income but doesn't keep the Retainage Receivable on your balance sheet. There's no perfect solution based on my experience and each has its drawbacks. If QB would allow you to map RetRcv to an A/R sub-account, that would solve it, but you can't map an item to an A/R account. Hope this helps, somewhat.

Rainflurry · ‎November 20, 2024

@nphudson

I forgot to mention that if you map your RetRcv to an income account, you will show -$1,000 income on cash basis until you receive payment so that's not really getting you anywhere.

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Retainage reflected in Balance Sheet but now P&L income is overstated - help!