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Handling Retainers in QuickBooks.

In the past 2 months, I have gotten 2 people that ask me how to handle retainers in QuickBooks software. I figured it might be time to make a post about this to help you out. When a company asks for a retainer, this basically means that they want a lump sum of money up front and then once they do their billable work, they use the retainer to pay off those invoices. Here is the tricky part, the retainer given to you is not considered earned income. It is actually a liability as at the time you accepted the retainer – you didn’t do any work for it yet. So how do we handle this in QuickBooks? The first step would be to create an ‘Other Current Liability’ account in your Chart of Accounts called ‘Retainers on Account.’ Then you want to create 2 items in your item list as Other Charge items. One that says ‘Pre-Paid Retainer on Account’ and one that says ‘Paid by Retainer on Account.’ When creating these items, you want to be sure to make them single sided items and have BOTH of them post to ‘Retainers on Account’. Now it’s time to ask your customer for a $5000 retainer. Create an invoice to that customer and use the item ‘Pre-paid Retainer on Account’. Put in the amount as $5000.00. When they give you the check, receive it against the invoice as normal. This will put the $5000.00 into that liability account that you created. Once you have done some work for this client and you have an invoice that needs to be paid, you can use that retainer money against that invoice. Pretend you did $1000.00 work of work. To do this, create the invoice for the work as normal and make sure it comes out to a total of $1000.00. Once you have all your items and prices in, on the last line add in the item called “Paid by Retainer on Account.’ In the amount column, put in a negative $1000.00 for the amount of the retainer that you are using against this invoice. This will mark the invoice as paid and pull $1000.00 out of that Retainer liability account and will also show $1000.00 of earned income. Now, if you have multiple customers that you have retainers for and you want to see the balances individually, you can double click to get to the register of the Retainers on Account liability account. Right click on one of the customer names and run a QuickReport. Once you are on the report, you can modify to add the Debit and Credit column. Now you can see all the Debits & Credits (or Charges and payments) that have affected this customer’s retainer. As always, if you need assistance, don’t hesitate to call!
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46 Responses to Handling Retainers in QuickBooks.

  1. James Petty says:

    Thanks for this walk through! It accomplished what 2 hours + of quickbooks ‘pro’ support couldn’t!

    One question though. How would you suggest I send a report to a customer showing their charges vs the retainer with a balance at the end? Something like a statement?

    • Ashley Wallace says:

      Hi James! Thanks for reading this post. The easiest way to create a report would be to open the PrePaid retainers account in the chart of accounts. Right click on one of the transactions for the customer that you want to create the report for. Choose QuickReport. This will give you a report that shows all the transactions in the retainer account with that customer name on it. It will show you the $ in for the retainer and then all the times you have used the retainer to pay invoices and will give you a final balance as well.

      • James Petty says:

        Hi Ashley,

        What is throwing me off about the whole thing is this.

        I run the quick report but it’s showing my invoices to the customer for the retainer on account as positive income in that account even if they haven’t paid the invoice. So I’m trying to run a report to show them the following:

        They have paid me XXX to date and owe me for YYY but when running the quick report it looks like the unpaid invoices are still showing income?

        Let me show you a screenshot
        http://screencast.com/t/k73dzRJOUia

        • Alicia says:

          James

          If you get a minute take a look at my response to Victor below. One of the ways that I handle this is to create a Sales Order or Estimate for the request and only turn it into an invoice once it’s paid.

          Another option to only track the available retainer (given the steps in Ashley’s post) is to create a customer report that filters only for paid deposits.

          Let’s start with a Customer Balance Detail Report. In the customization window we are going to add a few filters.
          Account: Select the retainer account you created above.
          Paid Status: Choose Closed
          Change the header to something like Retainers on Available on Account and hit OK
          You will want to memorize this as well so you can use it again.

          If I didn’t answer your question please feel free to give us a call.

  2. Victor Rivera says:

    Thank you for the above instructions, it was extremely helpful! However, I am still confused. I just purchased Quickbooks Pro 2013 and during set up I indicated that this program would be used for a law firm so it created an account called “Trust Account.” This account is a bank. In reality, whenever I receive a retainer, I deposit that money into a trust account at the bank so I understand why Quickbooks would create this for me. However, your instructions above talks about creating a liability account. Is there a way to incorporate these two accounts – “Trust Account” and the “Retainers on Account”? I understand that the retainer is an expense since it is not earned but I still need to show where the money is actually sitting, in a trust account at the bank.

    Thanks again for your help.

    Victor Rivera, JD, MBA
    The Law Office of Victor Rivera

    • Alicia says:

      Hi Victor. Thanks for your question. Every entry in accounting must have a debit and credit of equal values. QuickBooks generally does this double sided entry in the background so you don’t need to know one from the other. Quite frankly I often get it wrong so QuickBooks is my best friend. To begin, you should understand that Retainers are actually a liability type account not an expense. This will reside on your balance sheet until such time as you invoice your client and use that money to pay for the services you provided. So in this scenario, the “Retainer on Account” (Liability Account) will be credited and “Trust Account” (Bank Account) will be debited (I’m intentionally skipping over a couple steps and accounts here to hopefully make this easier to understand). When you bill for your services you will than begin to affect your income statement.

      A word of caution that is often overlooked. When you “invoice” your customer for this retainer you will affect the liability account even though you may not have received the money. So it may appear just by looking at this one account that you have more money from your clients than you actually do. I typically recommend using either a Sales Order or Estimate (depending on the version you have) to request the funds and convert that to an invoice once the funds are received. This way your liability won’t be overstated. If this extra transaction is too much work than you and your accountant will need to review these unpaid retainer requests regularly to ensure you know what’s what.

      Finally there are custom reports you can build and memorize to help you keep track of retainer amounts by customer.

      Feel free to contact us if you need additional help on this.

      Alicia

  3. Red says:

    Now it’s time to ask your customer for a $5000 retainer. Create an invoice to that customer and use the item ‘Retainer on Account’. Put in the amount as $5000.00. When they give you the check, receive it against the invoice as normal. This will put the $5000.00 into that liability account that you created.

    Did you mean to say use the item ‘Pre-Paid Retainer on Account’ in this paragraph? I set it up this way and this makes sense to me. Thanks for this by the way. The older QB retainer/ prepayment solutions were more confusing and roundabout.

  4. Bryan says:

    Thank you Alicia, this is very helpful. I have used your method to set up the retainer accounts, however, I have run into a bit of a wrinkle. I deposited the client’s initial $1K retainer on one invoice and marked it as paid. On the follow-up invoice, I billed the client $1050, transferred the $1K from the retainer account and then invoiced the client for an additional $3K retainer, leaving an amount due of $3,050. However, when I ran a P&L report, it looks like the $1K retainer transfer was applied pro rata among the time charges and the $3K additional retainer amount invoiced instead of being applied only to the time charges.

    What is the best method for me to use to be able to simultaneously apply previous retainer funds to a client’s amount due and invoicing for additional retainer funds? Is there any way that I can specify how the $1K retainer would be applied among the line items of the invoice? Thank you so much for your help, sorry for the long question.

    • Alicia says:

      Welcome to our community Bryan. I’m glad this post helped you as well. Let’s go through your question using an example with easy, round numbers. That way we can ensure everyone benefits from your insight and answer your question on how you should handle this in the future.

      As a normal course partial payments on an invoice will be spread equally across all lines of that invoice. There is no way around it. Let’s say your going to charge $500 for services you provided (one line on the invoice) and add a $500 additional retainer/deposit request (our pre-paid retainer item) for a total invoice of $1000. So we have $1000 in accounts receivable, $0 in available customer retainer, and because you are running your reports on a cash basis, $0 income.

      You now get a $500 payment for your services (50% of the total invoice). Since you only sent out one invoice for both services and retainer, I’m uncertain how you would know this was only to pay off services but your the boss so we apply that to the open invoice. At this point we would run a few reports to see what happened. Accounts receivable will be down to $500, $250 of the income you invoiced will show on a P&L and $250 of the unpaid retainer request will show as paid. This obviously is no good. AR is accurate but we have understated income and overstated our retainer payments.

      What can you do? Well that depends on what type of business you run. If you are a lawyer or in any other business where this is legally governed, the answer is pretty straight forward. You need to create two separate transactions to ensure your customer retainer accounts are accurate. If you are concerned about sending two invoices, think about using a detail statement instead. Otherwise it’s may really just be up to you and your accountant. If you run your books on an accrual basis your income will be reflected properly and if drill in to some of the reports you can tie out the retainer account and accounts receivable. This later option is pretty messy in my opinion but…

      A few additional notes on this:
      Review my reply to Victor. As I mention in that, when you “invoice” your customer for this retainer you will affect the liability account even though you may not have received the money. So it may appear just by looking at this one account that you have more money from your clients than you actually do.
      This idea of partial payment across lines also happens on bill payments. If you partially pay a bill that has more than one account, item or customer:job associated to it, the payment will be dispersed across all these lines equally.

      I hope this long winded answer was helpful.
      Alicia

  5. Jerrod Jaeger says:

    I found a contradiction in your instructions that is making this difficult to follow. You write as follows:
    “The first step would be to create an ‘Other Current Liability’ account in your Chart of Accounts called ‘Retainers on Account.’ Then you want to create 2 items in your item list as Other Charge items. One that says ‘Pre-Paid Retainer on Account’ and one that says ‘Paid by Retainer on Account.’ When creating these items, you want to be sure to make them single sided items and have BOTH of them post to ‘Retainers on Account’.
    Now it’s time to ask your customer for a $5000 retainer. Create an invoice to that customer and use the item ‘Retainer on Account’. Put in the amount as $5000.00. When they give you the check, receive it against the invoice as normal. This will put the $5000.00 into that liability account that you created.”

    When you say “the item ‘Retainer on Account,” what do you mean? As far as I can decipher, you recommended creating an ‘Other Current Liability’ named ‘Retainer on Account,’ not an item. You recommended naming the items something else.
    Please advise.

    • Ashley Wallace says:

      Hi Jerrod – Good catch! Sorry about that. I have revised the post but to answer you directly here, the Item that I meant to say was “Pre-Paid Retainer on Account”

      Thank you for reading our posts!

    • Jerrod Jaeger says:

      Oops, it appears that Red already asked this question and you answered it successfully. Sorry for cluttering the comments.
      However, I have another problem using your system. I followed the steps, but I’m left with a balance sheet for the client that still reflects an asset for the total amount of the retainer in the ‘Client Trust Account.’
      Is there another step or did I do something wrong?

      • Ashley Wallace says:

        Jerrod – I’m not 100% sure what you are trying to explain. When you say you have an “asset” for the total amount of the retainer, do you literally mean an Asset type of account is showing the retainer amount? If so, it sounds like you have created the retainer account as an Asset type of account instead of a Liability.

        If by “asset” you mean that you are showing a dollar amount in the liability account on the Balance sheet, this is correct. You will continue to show that liability until another invoice has been created for services rendered and you use the prepaid retainer to pay that invoice.

        Hope this helps!

  6. Ellie says:

    When creating other charge items for ‘prepaid retainer on account’ and ‘paid by retainer on account’, how do I make it single sided and post to retainer account?

    • Alicia says:

      Ellie,

      Sorry it took so long to get back to you on this. When setting up an “Other Charge” by default it only gives you the ability to set up a single sided item. Simply select the retainer account in the “Income Account” field when you create a new item.

      I hope this answers your question.
      Alicia

  7. Bernadette says:

    HI
    We have been using sales receipt for up front retainers and pretty much follow the instructions that you have graciously posted above. My question and or problem is that after we apply the “Paid by Retainer” it is reducing the sales of that customer. Is there another account that should be used for any of the two “Retainer” items? It appears on reports that the retainer payments are not showing as income, only debiting and crediting the liability account. Thanks

    • Alicia says:

      Bernadette,

      I can’t be sure but what I think you are seeing is a function of the report you are running rather than what is actually happening to income related to your client. Are you referring to the Sales by Customer reports? If I am correct with this assumption, one way to use this report and not have it be affected by this retainer amount is to modify it for only Income & Expense accounts or a combination of account for those used in your other items. As an alternative, a most accurate is to use the Profit & Loss by Customer reports.

      Either way, a retainer or deposit is technically never income. The income you show on the books should come only from the services (or goods) you provide and the invoicing of those. I’m going to use an example with really big amounts to illustrate why we use this retainer process and account allocation.

      Let’s say you receive a $100,000 retainer. This is not your money until you provide services, therefore it is a liability on your books.
      You then provide consulting services that amount to $25,000 per month over the course of 3 months.
      Each month you invoice the $25,00 using a consulting item posted to an income account and use a portion of that retainer to offset the account, the client owes you nothing.
      At the end of each month you now have $25,000 in income and your liability reduces by $25,000.
      If your engagement ends there, you have $75,000 in income and a $25,000 liability left over that is owed back to the client.

      Why would you not just show the $100,000 as income that is then credited when you refund that money? Well, let’s say you received that retainer on December 31 and showed it as income rather than a liability. You would have to pay taxes on that $100,000 even though when it was all said and done you really only did $75,000 in income related services. What would happen if on January 1 that client wants their money back and has grounds for you to refund it in its entirety? You would still have to pay taxes on it and have to wait an entire year to potentially get that back.

      I hope this helps illustrate what is going on and why this is a suggested method. I would be happy to discuss further if need be.

      Alicia

  8. Mike says:

    Alicia, I’ve been reading your posts, you’re generous with your time. My question is when I write up the invoice and at the end put in the “Paid by retainer on account” in negative numbers it works! The Retainer on account is debited and the invoice has a paid stamp on it. However, I don’t know where the money has gone. In the general ledger it shows it posted to accounts receivable. How do I get it from the Retainer on Account into my checking account to offset material purchases?

  9. Mike says:

    Alicia, I’ve solved it! In the item ‘paid by retainer on account’ I checked the box ‘this item is used in assemblies or is reimbursable’ entered the Retainer on Account as the expense account and the checking account as the income account. Thank you for your guidance!

    • Alicia says:

      Mike, can you explain your process a bit more. Looking at your post it seems that you might be doubling your deposits. Once you get to the step you are describing above there typically is no money changing hands. That’s been done already when you receive payment on the Pre-paid retainer step.

      Please let us know what your process is so we can be sure we have this set up right for you.

      Alicia

  10. Mike says:

    Alicia, you’re right. My ‘solution’ did credit my checking account but didn’t debit the retainer account. So now I’m stumped again. So, back to my question on the 25th. How do I debit the retainer account and have the amount credited to my bank account?

    • Alicia says:

      Mike,

      Feel free to contact me at afleri@pnatc.com or 646-380-4975 so we can talk through what you have done and where there might be a misstep. In this workflow there is no money going into a bank account at the point you are describing.

      Here is how our system is set up. Let me know how you are doing it.
      Ex: Let’s pretend for a moment you are going to do a job for $1000 and your customer pays you for the whole job upfront.

      1. 1. You create an invoice/sales receipt for $1000 using the Retainers on Account item.
        Debit Undeposited Funds/Credit Retainer on Account
      2. 2. You go to the bank with your $1000.
        Debit Bank/Credit Undeposited Funds (Hint: This is the only step where money is going to the bank)
      3. 3. You deliver the goods and provide and invoice/sales receipt itemizing service and goods delivered. Use Paid by Retainer item to zero out invoice. Customer paid you in step 1.
        Credit Income/Debit Retainer on Account
  11. Jonathan Fink says:

    Thank you for your advice on this issue. One question. I have followed the procedure. Problem is I just came to month end and issued an invoice against my client retainer. The retainers on account is now reflecting the current retainer balance but my accounts receivables did not adjust to reflect the new reduced accounts receivable now that I have taken some money out of the retainer. How do I adjust the accounts receivable to reflect the real balance now due.

    • Alicia says:

      Hi Jonathan,

      Sorry this is not doing what you had expected. Hopefully we can figure out what is going on, we may have to go back and forth a couple times.

      So, this part of the process does not relieve any existing AR. Let’s pretend the retainer request is the only invoice you have for that client. Once they paid you the retainer amount, you should have used it as a payment against that open AR, thus leaving them with a zero balance. You create an invoice and use the “Paid by Retainer on Account” item. The balance of that invoice is your services less the retainer used. In this example that balance is the only AR you have for this client.

      When you look at the open invoices for the client you are referencing, what is on those invoices?

      Feel free to respond here or email me directly at afleri@pnatc.com

      Alicia

  12. LISA says:

    OK, so I’m on the paying side of the retainer.
    We paid the attorney a retainer and they send us monthly statements on what was spent, but I need to track it in QB. Your help would be appreciated.

    • Alicia says:

      Lisa,

      Thank you for your question. Ashley had a post last year that breaks down this idea of vendor prepayments/deposits. Whatever you care to call them. The post is written for prepayments for inventory but functionally in QuickBooks the process is the same for the retainer you need to track. In your case I would substitute the account “Prepaid Inventory Account” for “Prepaid Expenses”, that way you can use it for this retainer or any other deposits/retainers you may make in the future. See that post here

      If you need further clarification please let us know.

      Alicia
      afleri@pnatc.com

  13. Larry B says:

    Thank you for this post. I’ve been using this method for a while now and it is perfect. One quick question, when I have to refund a customer the balance of their retainer, what is the best way to do this. I have issued a check and used the retainer item and I have used a credit memo. Under the customer center, when I pull up their account, it shows a negative balance instead of a zero balance. BTW, do you do long distance consulting?

    • Alicia says:

      Larry,

      Thank you for your question. At first glance you would think a credit memo would be most appropriate for this. In truth however, all the invoices to this point are fully paid so a credit memo would in fact have a negative AR value. For me a check is best. Use the item tab instead of the expense and select the same deposit/retainer item you used for the original transaction.

      Hope this helps.
      Alicia

  14. RD Leyva says:

    Thank you for your post. I work for a lady who is an Interior Decorator. Her business is Cash Method, but she receives Retainers from her customers. Before reading your post, I followed another post using Accounts Payable, but found using the Accounts Receivable (Invoicing) was easier. She pays cash for all items, such as supplies in advance. When the work is complete she will bill the customer for all items, plus her fee. Using the Enter and Pay bills work for the expenses, except the payment shows up in her bank account again. This means a journal entry should be made to reverse the entry. Following your post the items will show up as earned income. Question – Are they considered earned income or should the items be credited?
    Please help me.

  15. We are a small consulting company working on retainers and I have found an easy solution for the retaines that actually shows the balance available in the customers’ statement.

    Create a sales document template and in the header, instead of order or order confirmation call it Pro Forma Invoice. Simply make a sales order for a retainer and print it using the Pro Forma template. Most companies will pay a pro-forma invoice since this is a common business practice especially in international trade where prepayments are quite common.
    When you receive a payment post it against the customer’s account resulting in a credit balance in his favour. Now proceed to invoice your time and services as you would normally and post. The customer account will always show the balance available and you can send normal statements. Additionally you can set up your invoice to show the available amount which I labelled “available time bank”. That’s it! It works well for me and does not run afoul of any accounting practices since the payment is justified by the pro-forma.

    • Alicia says:

      Bill

      Thank you for the suggestion. I use the Sales Order function as well. That response is way up at the beginning of the comments. It sounds like you do it slightly different when it comes to the payment itself. Where I usually convert the SO into an Invoice and take the payment against that. It sounds like you take the payment in and hold it open as a credit on the account. I imagine you see that as a negative on the AR statements. What do you do with the open Sales Order? It that created with regular items posted to income and used when you actually bill for services?

      Definitely one way to go and for a lot of companies that best because it flags the person that is invoicing that there is an open credit on the account.

      Thanks for the input.

      Alicia

  16. Theresa says:

    This is a great thread to follow. Thank you. I have a situation which is slightly different and need your help. All retainers we receive are non-refundable. Technically they are income once they are paid. Following your steps above, changing the retainer account to an income instead of liability, would double input income once the invoice is created. What would your solution be?

    • Alicia says:

      Theresa,

      Great question and the first time I have come across it. So if you were to use the steps we recommend, invoicing for the retainer and then using that item as an offset when you invoice for the goods and services you in fact will not be doubling income if you change the account to income. Let’s see if I can explain why without the ability to draw t-accounts.

      Let’s pretend you are a new business with one customer. Today, January 1 you get a deposit of $1000. You look at your P&L and you will see $1000 in income. The next day you are going to invoice your customer for $500 worth of goods/services. You have lines on an invoice representing these goods/services with an income value of $500. However once you add the “deposit” line to reduce the overall invoice you are now lowering the total income received on that invoice by the value of the “deposit” line. If you use $500 of the deposit, you have no accounts receivable and no income for that day. If you were to run reports just for today, January 2, you would have no income and nothing in accounts receivable. If instead you ran a report for both days together you would have $1000 in income and no open accounts receivable.

      So in summary, changing the account from a retainer account to income will work as long as you do the rest of the process the same too. Hope that makes sense.

      Alicia

  17. Dawn says:

    Alicia – this is a wonderful thread and I’m so happy I happened upon it. I have this exact scenario – we require retainer deposits, however, we have not done any work at that time and then invoice against that retainer as work completes. Then, we iterate that process until the job is done. So your suggestion is appropriate by creating the liability account. What bothers me about this, however, is that time before they actually pay you the money but you’ve created the invoice. It takes anywhere from two weeks to two months to receive payment for our industry, and we have about a 25% fall out rate, which means that not all invoices get filled. So, you have a false liability on your books, that actually isn’t a liability until they give you the money. At least with treating this as income, you can switch your reporting from cash to accrual to differentiate real money you’ve received versus “theoretical” money. I realize that argument is not sound because, in fact (as you state) it is not appropriate – you have not earned the money. But also having a false liability on the books for that time you haven’t collected the money is bothersome too. And, in the “bad debt” scenario, how do you make the corresponding adjustment in this case? Any thoughts would be appreciated.

    • Alicia says:

      Dawn

      Thanks so much for checking out our site. So Intuit’s recommendation is the process suggested in the original post. However I usually start with an estimate or sales order (depending on the version you have ) and only convert those to an invoice when I get paid. You can report on the ones still open and these transactions have no effect on the financials since they are non-posting. Additionally you can customize a template just for this so it looks like an invoice if that is what your clients require to pay you.

      There is more detail about this in some of my other replies if you need it. I know there is a lot up there but it may help you figure out the best way for your business to handle this function.

      Let me know if you need any addition clarification.

  18. Lakin says:

    I have followed all the directions for setting up the “pre-paid retainer” and “paid by retainer” items as well as the client retainer account. I made a couple of dummy accounts and created invoices for those for retainers and invoices for work and I managed to figure out how to apply a payment to the invoice from the retainer using the paid by retainer item and putting in a negative for the amount of the invoice. What I need to figure out (and maybe I am missing it somewhere) is how to get a client specific report that I can send out to each client showing the amount left in their retainer and what payments have been deducted from it. We add up and invoice for billable hours every two weeks and up until now the firm was just adding to one invoice but it was becoming to confusing for the clients so we are going to do new invoices each billing period, they seem to understand the invoices for work but they always want to be able to see specifics of their retainer. Also, we write checks for the client’s filing fees out of the escrow account where the retainers are held. I need to know how I would reflect this in quickbooks for each client. Thank you!

  19. Alicia says:

    Hi Lakin,

    So I traditionally do the following to see what clients have on retainer. This report will return all clients but you can further filter for an individual if need be. The only problem I have had is if you have different matters for an individual client. It will be difficult, if at all possible, to differentiate these unless you have the individual matters set up as separate jobs. Let me know if this works for you.

    Run a Customer Balance Detail Report. In the customization window we are going to add a few filters.
    Account: Select the retainer account you created above.
    Paid Status: Choose Closed. This ensures we are only accounting for paid transactions.
    Change the header to something like Retainers Available on Account and hit OK
    You will want to memorize this as well so you can use it again.

    If you need further explanation please let me know.
    Alicia

  20. Lakin says:

    Thank you, that show’s exactly what I need it to. Now as far as paying filing fees out of the trust account for each client should I deduct that from the retainer on the invoice I create for it or should I put it on another invoice? It’s not actually an income to us as it goes straight from their retainer to the court.

    • Alicia says:

      Lakin,

      Sorry about missing that part of it. The filing fees should absolutely go on the invoice so your clients can see where their money is going and you can be sure you are accounting for their retainer properly. What we generally recommend, since this is neither an expense or income, is to create a two sided “other charge” item for filing fees. You would use this on the check when you have to pay the fees (use the items tab) as well as the invoice to show the charge.

      To do this create a new item and simply click in the box labeled “Items are used in assemblies or are a reimbursable charge”. Select a filing fee account you probably already have in your expenses for both the expense and income account allocation. When you use this to pay the fees the expense will increase and when you use it on an invoice it will reduce that expense for the same amount. In the end, if timing is right, that account balance is zero.

      If you already have an item set up, and it’s not double sided, you can edit it for this purpose by selecting this same box and adding the expense side.

      Finally, to make life easier you may want to use the “billable” functionality on the check side. This way you can be sure to invoice your client for these fees.

      Hope that explains it for you. Let me know if you need further clarification.
      Alicia

  21. Lakin says:

    That does help but what about in an instance where we pay filing fees directly from the client’s trust account? We have two checking accounts, an office account and the trust account where we hold retainers. We typically write filing fee checks directly from that account rather than doing it as a reimbursable charge, therefore in the past I’ve never put it on the invoice and then reimbursed the office, I’ve always just deducted the amount in the spreadsheet that I have for each retainer but I really need to find a way to also show it in quick books. Thanks for all your help!

    • Alicia says:

      Lakin,

      The process I described above doesn’t change here. Since you are using money from the trust account the client will not need to pay you back. So just like the other invoices that are paid by retainer, simply add that “paid by retainer” item to the invoice as a negative value to zero it out. The client owes you nothing and by invoicing you have zeroed out the filing fees expense account and reduced the clients retainer amount by the amount of the filing fee.

      Here are all the steps with basic values to illustrate
      Invoice and get paid for Retainer of $1000
      Trust account increases to $1000
      Customer Account increases to $1000
      Filing Fees are not effected

      Pay filing fees of $100
      Trust account decreases by $100 (now $900)
      Customer Account stays the same (still $1000)
      Filing Fees expense goes up to $100

      Invoice for filing fees of $100
      Trust account stays the same (still $900)
      Customer Account decreases by $100 (now $900)
      Filing Fees expense goes back up $100 (now $0)

      Let me know if you need more. Happy to talk you through it if a call is best.

      Alicia
      afleri@pnatc.com

  22. MARY says:

    Question regarding P & L and Retainer.
    I am not seeing the Retainer or Invoicing on the P & L using the Method you have described.
    I have tried a second method to See the invoicing on the P & L. Please advise if #2 is correct
    Method #1
    I have set up the Retainer Account for the client. I create an Invoice and select the Item – Retainer (which is set up as a Current Liability) I receive the Payment for the Retainer. The payment credits the Bank account. This credits the Retainer account. The P & L on Cash and Accrual show NO invoices for the Retainer Invoice trans actions.
    I create an Invoice for Services. I then apply the retainer for Services by selecting the Item Retainer by creating a line item on the Invoice with an credit of the amount of the Service Invoice. The P & L shows no transactions on Cash or Accrual – What is missing.
    METHOD 2
    The second way I apply the Invoice is Creating a Journal Entry Debiting Client Retainer and Crediting AR. Then I apply the Credit to the Invoice. I now see the Invoice on Cash and Accrual P & L
    Please advise if using the Journal Entry is correct. Or there something in the #1 method I am missing.

    • Alicia says:

      Kit,

      Thank you for your question. I’m interested to know what is going on for you. It seems unusual to me that QB would register the income when you use a JE to “pay” the invoice but not when you use a retainer item on the invoice itself. So without seeing what is going on let’s talk about what we should see and how to see it.

      First let’s check on the items we are using to create the invoices. As you mentioned the Retainer Item is, and should be, pointing to a Current Liability Account. For the Services performed, the account selected in the drop down should be one of your Income Accounts. It is these service items that drive the value in the P&L, not the retainer, so it is important these are posted to an Account on the Income Statement.

      Next, find a date prior to start of the QB file. Usually January 1990 works. Generate a P&L and Balance Sheet Detail report for that year. Now that we are set up let’s enter our test transactions and see what is going on. Be sure you delete these transactions after you are done with this test.

      January 1, 1990. Create an invoice for a retainer of $1000
      Balance Sheet
      Debit Accounts Receivable
      Credit Customer Deposit
      Profit & Loss
      No activity

      January 2, 1990. Receive payment for Retainer Invoice
      Balance Sheet
      Credit Accounts Receivable
      Debit Undeposited Funds/Bank
      Profit & Loss
      No activity

      January 3, 1990. Create an invoice for service of $1000. Don’t pay it or use retainer item yet.
      Balance Sheet (Accrual)
      Credit Accounts Receivable
      Debit Equity/Net Income
      Profit & Loss (Accrual)
      Credit to Income
      Profit & Loss (Cash)
      No Activity

      Now go back into the invoice and add the retainer line
      Balance Sheet
      Debit Customer Deposit
      Credit Equity/Net Income
      Profit & Loss (Accrual and Cash)
      Credit to Income

      If you got the same results than everything is working as it should. If not let me know and we’ll try to narrow down where the problem is. Don’t forget to get rid of the transactions above!

      Thanks again for your question.

      Alicia

  23. Shelli says:

    I set everything up as explained, and I thought everything was working brilliantly until I pulled up the Balance Sheet. We are cash basis, so there should not be any A/P or A/R on the balance sheet, but the retainer invoices not yet paid are showing up on the A/R account on the Balance Sheet. I read through some more of the thread here and see that you suggest using an estimate or sales receipt when billing for the retainer and then later converting it to an invoice. Will this solve my problem? I don’t want anything to show up on the balance sheet except the liability account balance.

    • Alicia says:

      Hi Shelli,

      Yes, in addition to the overstated retainer liability, the circumstance you are describing is one of the reasons I recommend using a Sales Order for the retainer request. If you only convert the SO to an invoice when you receive the money there will be no AR. Further you can run an open SO report if you want to see who still owes you for the retainer requests. I think it is the cleanest way to handle this process.

      Hope this helps.

      Alicia

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