Managing Customer Deposits or Retainers

I get frequent Quickbooks questions and I believe that many users have similar questions. I will start posting answers to these questions in my blog for everyone. This week I received the following question:

Hi Tirena,

Please tell me if you know how to manage this issue. Often times, I get a retainer for a job. We create an invoice and customer pays the invoice. So, QB considers it an invoice paid and the account balance is $0. But, the system should show it as a credit. So, the question is “how do we bill for a retainer and have it show up as a credit?”

Dear Client,

The best way to handle this issue in Quickbooks is one of the following:

First, simply do not issue an invoice. Enter the payment on the customer’s account and then let it show as a credit.

However, customers often need an official document to pay from so you can either;

Enter an estimate or sales order (depending on your version) and then the customer can pay off that document and you enter the payment on the customer’s account showing the credit.

OR

Enter an invoice then void it or right-click on the invoice to mark it as “pending”.

Once you start billing the customer for work, you can enter “real” invoices, then just apply that payment to those invoices. This is the easiest way to handle it in Quickbooks for most users. This method also gives your customer a clear accounting if you printed a statement for them.

Technically, your accountant will tell you, a credit or customer deposit should show up as a liability and then you apply it later. Quickbooks just doesn’t have an easy way to do this. If the retainer will be used up prior to year-end, then using the method above should be just fine.

Otherwise if it carries over or for Financial Statements for outside users (like banks or loans) or tax purposes your accountant has to reclassify it. Again for practical use purposes, using the method above will help to make sure you don’t make a mistake.

The harder, more technically correct way is to issue an invoice and use an item called customer retainer”. That item should be linked to an “other current liability” in your chart of accounts called “customer retainers”. Because until you earn it, it’s not income and it’s definitely not an asset. As you invoice your client for real work or product you can reduce the invoice by the amount of the retainer by either issuing a credit memo or entering a negative line item on the invoice using that same item called “deposit”. Then continue until you use up the deposit.

The only problem with this is you have to somewhat manually track the deposit. It’s all sitting in QB as a lump sum in that “other current liability” called “Customer Retainers” so you have to make sure you review that account regularly.

Either way should get you where you want to be, one is just a little more straightforward than the other. For companies that do a lot of retainers or have construction retention, there are other methods that are more complex than can be covered in a blog post.

Do YOU have a Quickbooks question I can answer? I’ve used Quickbooks since 1995 so there is very little I haven’t seen or fixed.  Send me a question and I’ll post the answer.  Go to the about page and send me a message https://qbmess.com/about/.