Retainer Invoice Example for Accounting Made Easy

Retainer invoice example for Accounting

so I got this question that says how do I manage retainage in QuickBooks Online I'm a new bookkeeper for a construction company okay that makes sense let's take a look at the definition of retainage in Wikipedia so we can all be on the same page retainage is a portion of the agreed upon contract deliberately withheld until the work is complete to assure the contractor or subcontractor will satisfy its obligations and complete the construction project the typical retention rate is 5% which half is released upon completion and the other half at the end of the defects liability period okay so essentially retainage not to be comp uh confused with retainer retainers are a different concept and I'm going to put a link in the description on a video about retainers more typical for like lawyers and some professional firms to charge a retainer and then charge by the hour against that retainer retainage is an entirely different context and we're going to explain it within uh an example of a construction project so we're in QuickBooks online and there's two types of retainage that you could see that you could be managing one is a retainage that you as the user of QuickBooks you as the business owner you as the accountant in that business are going to hold back funds from your supplier so instead of paying your supplier 100% you will pay them 95% and withhold 5% until they complete their end of the deal that's one type of retainage that's the retainage in which you are withholding the other type of retainage that you could be managing is your customers they're going to be retaining money from you so every time they pay you they'll with hold 5% or whatever and they won't release a whole thing until the project is completed or maybe a year after the project is completed that stuff would be lined up or lined out in the contract so the underlying contract between the two parties typically in a construction project but you could see it in other context the actual contract would outline what the retainage would be and what are the conditions to release that retainage so let's do both examples but first we need to set up the account that we're going to use to track that retainage so I'm going to click on the gear menu top right of the screen click on gear and then click on chart of accounts that's the very first thing we're going to do we're going to make sure we have a retainage receivable and a retainage payable account we need to have both depending on the context that we're going to use it for so let's go into new we're going to create a brand new account and this is going to be a other current asset so here it say account type we're going to select other current asset that's going to be for a retainage receivable now you will notice on detail type that if you scroll down retainage is actually one of the detail type options now you don't have to pick that this is just an example of how QuickBooks Online tries to guide you in terms of understanding what options fit best under the specific account type that you picked so again other current asset is your account type detail type doesn't matter what you pick but we're going to pick retainage to um to be consistent there on account name we'll put retainage receivable so we do retainage let me spell that correctly so retainage re receivable asset I like to do like just sort of go one more step and put asset at the end just so we understand the concept so this is the money that our customers are withholding from us so I'm going to go ahead and click on Save and there's my retainers receivable asset I'm going to go to new one more time we now we're going to create the liability account under account type we're going to scroll down and select other current liability and then under detail type there should be an option for retainage but in this case there isn't and again QuickBooks is not perfect like there should be one uh but there isn't uh if you actually choose long-term liabilities same thing you actually don't see that there so for some reason uh QuickBooks Online isn't consistent with the detail types so in this case we we could pick uh something like other current liability and that would be uh fine again it doesn't matter what detailed type you use and then we'll put here retainage payable retain payable liability now typically the word payable already means liability and the word receivable already means asset I mean so there's no need for you to add that in there but I like to be extra explicit um so it's easier for us to understand okay we can even add if you want to to the name we can put uh withheld withheld from suppliers or something like that okay so it's like we are withholding the money so we are withholding the money from the supplier so it's little bit more explicit and then I can go back into my other uh retainage account we'll click on the little drop down menu click on edit and then we'll put here in parentheses uh with with held by customers okay so we're going sort of the extra mile or making this accounts super explicit so we understand we understand them so we're going to do I'm just going to type retainage here so we see our two accounts retainage receivable asset withheld by customers retainage payable liability withheld from suppliers right so this is who's withholding and and who is being the money withhold for okay so that's that's pretty clear there both of my accounts are set up in my chart of accounts next thing I'm going to do is I'm going to click on the gear menu top right and then I'm going to select products and services because I I have to actually create an item or a product or service in QuickBooks Online for it to be used to track the retainage inside my forms inside my bills inside my invoices that sort of thing so I'm going to go to new here on the top right go to new and I'm going to create a new service it needs to be a service item don't use anything else use a service item so in this this one we're just going to call retainage that's simple retainage simple easy now down here in terms of whether I sell this item or I purchase this item I'm going to select both of these because I I both use them in a sales transaction that's when I put it in an invoice or I use it in a purchase transaction which is when I put it on a bill okay on a vendor bill on a supplier bill so in a sales transaction I'm going to pick here the stuff that my customers withhold so I'm just going to type the word Customer because we actually put you know retainage receivable asset withheld by customers so that we know exactly which is the account that's going to get activated if that item or that product or service is used inside of a sales transaction inside of a customer transaction like an invoice and then on the other side I'm gonna type here uh suppliers and I'm using that because I actually added that to the name but it's the retainage payable liability which is the account that's going to be used within the context of when the transaction is used in a purchase transaction in a vendor supplier transaction okay so like the word supplier we could have we could have put vendor or we could have put subcontractor whatever is easier for you to um to read so we'll do save and close so now I have my retainage uh item in there and that retainage item is going to be used in the transactions depending on the context so let's start with the first one I'm going to go into new I'm going to go into an estimate I'm just going to create an estimate really quick and let's say I'm going to do an estimate for this customer Joe Mitchell kitchen remodel so that's my customer project that I'm doing this for and let's say that the whole project here and I'll just pick uh one of the items here let's say that the whole project here is $115,000 I'm just kind of simplifying the project here is a $155,000 project I'm going to click on Save approve this estimate or approve this uh this project convert it to an invoice and let's say I'm going to only invoice 20% because that's what we're doing we're doing progress invoicing however on top of the fact that I'm only invoicing my customer 20% of the whole project my customer is actually going to hold back 5% of the total dollar amount that's inside that exact invoice okay okay so if the invoice here is $33,000 which happens to be 20% of the whole project and forget the percentages CU they could be confusing just the invoice is $3,000 and our customer is going to hold back 5% of that not high 5% of the whole project 5% of whatever is being invoice so the second line item this is where we're going to put retainage okay and and we only need one item called retainage and if you remember we tie this item to our um to our asset account because our customers withholding it from us but now this needs to be a negative amount okay so this would be um this would be a five 5% okay which actually QuickBooks doesn't let you use uh uh percentages so what you have to do is you have to put negative negative .05 that's a 5% and then on the rate you put the total dollar amount of the invoice okay so that way it knows to calculate okay we're going to multiply the uh the $3,000 of the invoice times 05 or 150 uh dollars so that's exactly what's being retained now if you want to skip all that if that's way too complicated you can just type uh retainage and then here on the total amount you can just type 3,000 * .05 which is the same thing as 5% of 3,000 hit type and then let the system come up with $150 just make sure that you add the negative sign to it because your customer is not paying you they're withholding payment which means that they're going to underpay the 3,000 so that always needs to be a negative amount so whatever you think is best I actually like doing negative point5 and then $3,000 here because it's actually easier to read once you can understand what's going on so we can just put here uh retainage 5% on job or something like that okay so whatever you want to put there then I'll click on Save and we'll just kind of take a look at see what this invoice looks like once you print it and it's very simple there's my 20% of my project 3000 and then there is my 5% being withheld pretty simple pretty clear that should be easy to understand okay let's do one more invoice here and I'm going to pick a different project all together let's pick this backyard Remodel and I'm skipping the estimate process for now just to kind of simplif our life here and let's say we're going to use a multiple items let's say we have three different items so we have labor materials and equipment and uh so we have labors materials and Equipment okay so let's say if for labor is uh 10,000 or 10,000 materials is 5,000 and equipment is uh 1,200 so now we have a total of 16,200 what I normally would recommend if you have multiple lines is to add a subtotal adding a subtotal typic is helpful that way we see it right here we can see that what the subtotal is and we can put uh total amount you type here total amount invoiced for phase one or something like that just whatever whatever makes more sense and then we'll add the retainage right under it and again we can we can type here uh 16,200 time 005 and then just make sure you add a negative okay so if that's the way you want to do it that's one way to do it or you can just put as I mentioned earlier .05 and then 16,200 I'm just copying the number from up there which is the same 810 so we'll save that and we'll see what this looks like let do a PDF View and you get to see exactly what that looks like is pretty clear just again just make sure you add some line description to the retainage if need be okay so that uh that's two examples of retainage how it works within the context of the the invoices now I'm going to do one more thing here which is I'm going to receive the payment in one of those invoices just to kind of like throw things off here so let's do the kitchen remodel and then for this uh 2850 I'm going to go ahead and receive the full payment on that and then click on Save and close so one of my invoices is open and one of my invoices has a full payment that way we can kind of see the context when we see the reports um we're going to we're going to talk about the uh supplier version the vendor version of this briefly let's just start looking at the reports to see what retainers looks like so I'm going to go into reports and then I'm just going to pull up a regular balance sheet simple easy regular balance sheet click on that and then we should be seeing a retainage receivable asset account under current assets which is $960 if I click on that I'm able to see the entire history the transactions right here we have two different transactions uh for two different projects Joe Mitchell and Mary Garcia and is 150 and 810 so we know exactly what's going on we we know that our customers owe us $960 what's cool here is we can group these by name click on run report and then these two can be grouped together just collapses a little bit easier to read so there's my two totals by customer by project so very clear we know and have a very clear understanding of what's going on with these um retain ages now let's assume that for one of these uh we're going to invoice the customer the other piece and also let's say we're going to invoice the retainage as well so this one customer Joe Mitchell owes us $150 of retainage so we're going to invoice that let's say later in the future okay so let's do that now we'll do that the example now so we'll go ahead and uh let's just do a quick invoice here we'll open that in a new tab so we can keep our report alive and then let's just double check again this is the your Mitchell kitchen remodel so let's say after we done all the invoices uh it's been couple of months the contractual agreements uh went through and now we're going to get paid that retainers we're going to get our money back the money that our customers owe us so all we have to do at this point is just invoice the retainage and I'll put here 150 this time is a positive amount because we're not discounting it from the invoice we're now getting paid the remaining amount of uh of the retainage so we'll save that and then essentially when we go back into our reports and click on run reports we now should see that for the kitchen remodel job we had the 150 taken out and then we had the 150 uh paid back so it's very sort of clear uh how what's going on how these things are being taken away and then being paid back so we know that the total amount of retainage for that particular customer is zero it's cleaned out actually if I Collapse these here we get to see what the um actual total by customer is so it should be pretty easy to read I I'll make it a little bit easier to read if we um bring this screen a little bit to the right here and zoom out we'll click on this little gear button and then click on re reorder columns and we'll grab this uh amount and put it right there uh let's say on the second line click on run report and then we can collapse these again and then we get to see them right there very easy to read very simple way of knowing what's my retainage uh per customer same thing if we have a secondary invoice for this backyard remodel so just going to open up this invoice here for a second and I'm going to duplicate invoice just so we can see um you just more numbers more more more variables here and let's say this time is 25,000 and this is 17900 and this is 1960 okay and then we'll just come in here and do the 44860 here 44860 again we're still using 5% but let's say for this particular case the retainage is 10% again we're just using different examples here so you kind of see what that looks like with a 10% retainage then we'll click on Save and then we'll excit of that go back into that report click on run report and now we get to see the total amount being retained pretty simple pretty straightforward we can know exactly what's going on with all of our customers and all the retainage receivable this is the stuff that our customers is withholding from us and they owe it to us which is why it is an asset when we go back into the balance sheet it is our asset is it belongs to us it's just like an open invoice but instead of it being an open invoice by itself it's sitting as a retainage receivable that way it's very easy and very clear when you look at a balance sheet exactly what's going on in there now let's talk about the other side of the coin here which is what happens when you are withholding retainage from your vendors so let's do an example so we'll create a new bill here and let's say we're going to get a bill from Garcia plumbing and then Garcia Plumbing is going to charge us for uh some sort of subcontractors stracted labor and then this is going to be let's say uh8 $188,000 okay and I'm using the category details here which allows me to then go straight into the retainage payable liability and then in here I'll put the 18,000 time 05 and then just make sure that comes in as negative and then uh the subtotal here 17,100 is the one that contains the plus and the minuses for that bill now that's if I want to use the income I mean the uh the accounts directly the the instead of using items I can choose to use items as well so if I were to use items I'll pick whatever um item I have for labor so let's say it's the same 18,000 here okay and this could be um you know 18 time 1,000 right whatever the combination is doesn't matter it's the total amount really the one that matters and we'll put here the project whatever project it belongs to and then down here we'll put retainage same thing and then we can use the same logic we used before which is 0.5 uh negative and then in here we'll put 18,000 and then this will do the calculation for me so if you were to use um a purchase order a purchase order will flow through the bill just like this so it will look into the item section and not the category section but the result is the same at the end of day um your your uh your reports will look exactly the same because we tied that item to the correct account in the balance sheet so we'll save that and then we'll ex out that and then we go back into our balance sheet report now we see our retainage payable liability of $900 we held it from our vendors right so once I open that and I see exactly this is for Garcia Plumbing if if I group these in this case by vendor click on run report I know exactly uh which vendor I owe uh each of that retainer too now we'll do the same thing as we did before I'm going to create one more uh bill that way we have at least two of them then I'll pick a different vendor here let's do here John the contractor and let's say this one is going to be 17 * 890 and then this will be let's say a 10% retainage and remember rate I need to copy the same thing from the amount so this 15 130 so I'm just copying from the amount here so we uh we know what we're subtracting the 10% from okay then I'm going to click on save so it's an entirely different Bill and as I alluded earlier we're going to have one that's paid and one that's unpaid so you kind of see the dynamic when we switch to cash and acral which we'll get to do in a second so I'm going to mark this one as paid uh and then I'll click on Save and close if you remember the other one wasn't paid so we'll go back into the um into the retainers report and both retainers are showing here the 900 and the 1513 however if I actually click on this little um gear menu for the table and I go down and I'm going to check uh this little check box that says AP paid and I click out of that one of these is paid and one of this is unpaid so if I wanted to know what is my retainage payable liability only on bills that I have paid then I can switch this report to cash bases so when I click on cash bases and click on run report the one for 900 doesn't show because that's an unpaid Bill same sort of situation we would have if I go back here and do it for my customers same thing if I click on to look at the drill down the detail of my retainage receivable asset withheld by customers and I group these by customer click on run report I can click on the little gear here on top of the table the reports and do this time AR paid that way I'll know whether the transaction has been paid and unpaid I notice that one of these is unpaid so if I actually switch these to cash bases and click on run report only the stuff that's been paid shows and everything else that's unpaid will not show so let me show you a run report and then this will only show the ones are paid so it's pretty cool AC crew shows you both paid and unpaid and cash only shows paid okay um there isn't one that would only show on paid I guess that's you know that would be the question so you either only see paid on their Cash basis or see both paid and unpaid on their acral basis if you actually go into customize and go into filter you can actually go in here and look for AR paid and you can select with the filter you can select in this case unpaid and click on run report and that could be one way for you to show only the unpaid uh transactions that show up here under the retainage account you still will have to stick with the cruel if I go to cash and click on run report it just blanks the report because there's no such thing as unpaid cash transactions so you would have to pick a cruel and then pick that filter uh for unpaid or you can uncheck it if you want to see both paid and non paid and it works the exact same way on uh bills as well so with that being said I hope that was that was helpful uh that's how you manage retainage mostly within the context of construction and like I said look in the description I'll put links to other videos that are similar to this other videos related to construction and also um if you were looking for retainer which is a different concept I'll put links to that as well thank you see you in the next one