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Retainer invoice example for Customer Support

let's move on to client retainers so a client retainer is used whenever we receive a prepayment from a customer that is being served as a down payment as a deposit or a retainer that is then going to be used to pay invoices that are due for services that will be rendered in the future there's actually three ways to record this retainer the process alarm payments one is we can use a deposit method two we can use the accounts receivable method or the negative accounts receivable method and three we will use the earn income method now why do we need to choose one of the methods and why is it important for us to go this route so number one if we got a sales tax requirement so for example let's say that in your state you can only remit sales tax when the when the product has actually been delivered then you don't want to pre invoice that sale until you actually deliver it so it will require you to receive a payment upfront and and use one of these methods to record the prepayment before you actually create that invoice so again we're receiving a payment before an invoice is being created we could also have the other way where you can have a state where it doesn't matter if you were prepaid and you haven't delivered as long as you get paid then you owe the sales tax then in that case you would actually create the actual invoice when you get paid so that's really up to you now the other piece that could happen is sometimes you will get paid from using another system that that settles all the payments with your customers and maybe the timing in which you're creating invoices and the timing in which of recording payments is so far apart whether the payments are happening upfront or not it's just much easier to use this a prepayment account also materiality is important right for some folks using recording this pre payments could have a significant impact on the net income so that's also really important and and there's a lot of maintenance that goes in the process of keeping track of these pre payments so also consider client capable so if your client is not committed to to doing this in QuickBooks with high level of detail they may want to think about using something much simpler like the negative AR method or just screaming the invoice ahead of time now you want to record your invoice when the income is earned when the services have been delivered rendered and when the products have been shipped or delivered so that's why it's important to to separate the timing of payments with the timing of actual earned income which is why a payment and an invoice may have different dates and a payment could have a date before an actual invoice anyway let's start with the deposit method so with the deposit method we would actually set up or enable the deposits button and what the process will do is it will open a box inside of an invoice where you can create the invoice and put in there that you were paid beforehand now this is only useful when you're invoicing right when you're getting paid the original deposit only only useful for that and your income is going to be recognized immediately so you only really want to use this for a locational deposit this is not going to solve the problem of timing of getting paid up front and delivering the products or services later and posting that income for later so this is just simply to record an invoice and record an immediate payment upon that invoice or a partial payment upon the invoice this is simple this is easy most people understand this but your invoice is gonna be created on the exact same day that you receive that deposit that may not be what you're trying to achieve now if you are going to receive a payment before an invoice exists then what you want to do is you want to just receive the payment under the negative AR method just receive the payment don't apply it to any invoices this is gonna create a negative balance on your accounts receivable or a credit balance on the accounts receivable and then in the future once the work is performed you will enter that invoice enter those charges and then you're going to match that old payment with the invoice and then possibly apply a balance at in - to balance out that income account at the end of the year any negative balances to accounts receivable can be classified as unearned income if you want to clean up your balance sheet and not have any negative AR so let's do an example of this one because this one's really important so we'll start with a simple concept that a customer paid us upfront so I'm gonna go to receive payment and then I'm going to select my customer and let's say our customer paid us back on May 1st and it paid us $10,000 now you will notice that you get a warning saying hey you don't have any open invoice maybe you're not supposed to be receiving a payment but again we know what we're doing we're actually using the negative accounts receivable method and we want to record the $10,000 because we just got paid but we haven't delivered any products or we haven't render any services so I'm gonna click on save and close and then I'm gonna run an accounts receivable report or a balance sheet so we know exactly what's going on so I'm gonna go to reports I'm gonna run a balance sheet and then I'll back date this balance sheet - May 1st I'll just do all dates here and then we're gonna see our accounts receivable change this report now to accrual basis and then we're gonna see our accounts receivable it's a negative I'm gonna go ahead and click on that and you're gonna see that there's all sorts of things happening in this account we have negative numbers positive numbers as you can tell there's my negative accounts receivable that payment that we received that doesn't have an invoice that is affecting my balance negatively now of course in my accounts receivable account I have all sorts of numbers there so you can't really isolate it that easily but if I go to reports and then I run a balance by customer summary report so I'm gonna click on customer balance summary you're gonna see that our customer customer Corp has a negative balance of 10,000 and that's by design so I do want to owe that customer 10,000 because they paid us and I haven't any services yet now when it comes down to creating the invoice in the future let's say that now we've done the work I'm gonna go ahead and create the invoice I'll select my customer and let's say that I'm gonna charge them $21,000 okay and that's gonna be later on in the future let's say the 29th of May and now that has a balance of 21,000 from this screen I cannot apply the payment that's the only bad thing that's not something we could do from this screen so I'm gonna go ahead and click on save and close and then I'm gonna click on receive payments so I'm gonna click on the quick wear button then receive payments then I'm gonna select my customer and let's say my customer hasn't has not paid me the balance yet all I want to do is I want to apply the $10,000 to it so I select the invoice and then select the credit so I'm gonna select the credit for 10,000 select the invoice and then go to payment here and just put 10,000 that way the the actual balance of the payment received is zero because we're actually not receiving a payment we're just matching or applying the previously only applied payment with the invoice that was created later on in the future so I'm gonna go ahead and click on Save and close so now my running balance should now be $11,000 positive so the customer owes me now so then later on my customer owes me that balance I will receive a payment on some other date let's say this happen on June 8th by some other date in the future and then we received the customer and everything else forward will follow regular workflows that would just be a regular receive payment against the balances but it was the original 10000 that we wanted to record using the negative accounts receivable method let's move on to that third method which is my favorite method although I got a lot more work involved to it but it is my favorite in terms of setting up the correct accounting process anyway most accountants will actually prefer this method because it represents the information much better first step is you have to create a new other current liability account in your chart of accounts called retainer or customer the pass or prepaid customer income or unearned company Inc a customer income something like that then we're gonna create a service item with a similar name in color retainer and then we're gonna map the account to hit the same liability account that we just created in our chart of accounts then we're gonna create an invoice using that item to recognize that prepayment amount that we received before we've actually earned an income or before we are actually delivered any services or deliver the product and then in the future once we create that invoice we're going to record all all of our current items like a normal invoice and then we're gonna add as a negative dollar amount in that invoice that new retainer item and that's going to serve as an application of the payment that was previously made and that needs to be a negative amount in order to reduce that invoice to either zero if it's being paid in full or to the total dollar amount that that is that needs to be applied and then leave the balance there for the rest so let's do an example of that so let's start by going into the chart of accounts and we'll create a new account called customer deposits and that's going to be a other current liability account and we're gonna call this one customer deposits again you can call it on earn income you can call it retainer you can call it customer deposits all of these will work I do want to add the word liability next to it so it's just very clear that that's what we're doing we're recognizing a liability when we're receiving that retainer from a customer and I will click on save and close so we should have our customer deposit liability right here okay notice that I had another account in there but we're gonna ignore the one that says customer liability we're going to look at this one called customer deposit liability that's the one that we're gonna be tracking then I'm gonna go into my products and services and I'm going to create a new item we can make it a service item and then we'll call this one customer deposit and we make sure that this account is hitting our customer deposit liability account it's a little bit counterintuitive because it's saying you know what is the income account this is not an income account this is a liability account but again we're using this item to recognize that prepayment okay we're gonna go ahead and click on save and close and then I'm gonna use big dollar amounts here so it really stands out on the balance sheet I'm gonna create a new invoice now and I'm gonna select a new customer I'll pick the same one customer Corp and then let's say for example that for this customer I'm gonna receive at the beginning of the month I'll create a new customer just so we don't confuse I would call it customer Corp - okay so whoops where's my customer Corp - there it is and then let's say at the beginning of the month of May we receive a deposit so we're gonna select our customer deposit and we're gonna select $100,000 so let's say that's that's our deposit that's our prepayment so the customer paid us $100,000 we're gonna follow the regular workflow create an invoice call it customer deposit click on save and close we're gonna receive that deposit so we're gonna follow the workflow ingly nothing really changed changes in the workflow we received $100,000 that we invoiced our customer and we click on save and close now we're gonna go into a balance sheet just go to a regular balance sheet and let's do that all dates and let's pick an accrual report because this stuff will only show in our cool reports and then we're gonna notice that there's a customer that pasta liability for a hundred thousand that's exactly where where it is supposed to be now if I wanted to know what that hundred thousand dollars was I would click on the hundred thousand and I would see multiple transactions and there because I could have received another or another prepayment from an entirely different customer and let's try it let's leave that screen open here and I'm gonna go to invoice and I'm gonna invoice another customer altogether so I'll pick here triple-a towing and I'm gonna receive a deposit and let's say for them it's gonna be two hundred and fifteen thousand and I click on save and close okay I'm gonna click on run on the report and we're gonna see that both dollar amounts accumulate in that detail now if I wanted to group it to know the total I will go to group by and go group by customer and click on run and that's going to group them together and then when I start applying to those amounts you're actually gonna see that calculated on the report so I'm going to leave this report open here so we can look at it right after I create a transaction I'm gonna duplicate this tab here and then I'm gonna go ahead and invoice I'm going to create invoice for the future in which I'm gonna apply part of that retainer so again I'm looking at the report here I know exactly how much money each of my customer has so now I'm going to create an invoice let's go to create invoice I'll pick my customer okay and let me go ahead and now charge him for sixty three thousand dollars worth okay extra zero there sixty thousand dollars worth and then I'm going to use again this is now in the future after we've actually rendered the services and the customer has $100,000 on account unfortunately there's no warning here letting you know that that is sitting there somewhere you have to have looked at this report beforehand to know that the customer has a balance so that's that part is a is a manual process itself then we're going to put here deposit and then we'll put here negative sixty three thousand so we'll do negative sixty three thousand and we can put here applied deposit from five one whatever we want to put there really and then we're gonna click on there's an extra zero there so we're gonna click on save make sure that invoice zero is out so now the invoice is pretty much paid right there's no open balance it's now applying the sixty three thousand when I go and close that and go back to my report I can click on run report and now I can see that my customer Corp two actually has a balance of 37,000 because I applied that so when I go in my balance sheet my total is 252 and I can actually see the exact breakdown composition of how this works now let's say for example we have a another invoice that we're gonna generate for the same customer so let me come in here and let me create the invoice and that was there was a customer Corp two and then let's say the same voice is for fifty thousand so we got an invoice for fifty thousand but we will have to check the report that the client only has a balance of 37,000 so when I come in here to do a deposit this time around I have to limit this to 37,000 if I put any bigger dollar amount the invoice is going to show paid and it's not because the customer doesn't have that now giving me a accounts receivable money that's owed by a customer for $13,000 so let me go ahead and click on save and close now when I go to my report refresh it see that I have now zero in that retainer okay let's say that the next month comes in and the customer gives me another retainer so I'm gonna come in here and go to invoice and this is very common practice for agent marketing agencies I receive monthly retainers I'm gonna bring this up to June and let's say now they're gonna pay us a hundred thousand again this happens in June a hundred thousand again there it is and then we're gonna help go ahead and click Save and close okay so now I have let me just run the reporting in by customer so now that customer still has a balance of a hundred thousand now in parallel I need to run a report that shows me by balances by customer and I need to make sure that I don't have any open balances for a particular customer that's on my retainer account and that effectively is the case right now this customer has the hundred thousand dollars from the retainer that I just invoice and the thirteen thousand from the other open invoice if I click on that I've actually see that I got a thirteen thousand about our open balance from the other invoice and the invoice for the retainer I just received so normally because I just invoiced a hundred thousand I will receive my normal payment for this customer for the hundred thousand that I just invoiced right so that would happen ask normal and I will follow the normal workflow on June whenever I got paid but the problem is that I still have an open balance for thirteen thousand so what I must do whenever I go into my retainer report and I know that the customer has a balance in that retainer report I almost actually go back to that open invoice and I have to modify it after coming here and type another and then I'm gonna put here apply from zero six zero one eighteen deposit and then maybe the top one I should have added a similar comment right that way the customer knows exactly what is being applied and so the first one was applied from the from the main first deposit and the second one is being applied from the June first process I'm gonna put a negative 13,000 and then that's gonna cero out my invoice click Save and close so when I go back into my report run the report I should now see the proper $87,000 balance for that retainer so it gets it does get pretty tricky when we talk about retainers like that it does get pretty tricky because you have to ongoing Li you have to keep track of what's on that balance sheet account and what's on accounts receivable and you have to always go back and apply that negative amount to that so that's those are the three methods for handling pre payments from customers or unearned income from customers or retainers from customers now this last one is a similar method to track pre payments but instead of just concentrating on the total dollar amount we're also going to track the sessions or the quantity of sessions are going to be pre-sold so the situation is a client sells possibly multiple sessions of services and it's often at a discount right because the customer is paying them all upfront and we want to track both the income that we haven't earned yet and also the number of sessions that haven't been used yet so then we can consume them let's say for example as the month progresses so in the setup is we're gonna use the same concept well we'll have a liability account of some sort and then the actual service items are that are being created to charge against that liability then we're gonna create a bundle so we can group them together and the customer doesn't really get confused about what they're seeing and then we're gonna create those those transactions as delayed charges and then create invoices to map the actual service that you're selling and map the prepayment so we're gonna do both so let's do the example let's do it on the screen so we know exactly what how the process goes let's go first two products and services and let's create a couple of items here so I'm gonna create a service item I'm gonna do this just for our for our income categories I'm going to create an account called session and I'm going to send that just to my my income account whatever it happens to be just because I want to sell them in in units I want to call them sessions just to make it easy to understand and then when I create a new one and then I'm gonna call this one prepaid sessions okay but this one is gonna go into a liability account so I'm gonna send this one into my customer liability account maybe I'll create an account called prepaid sessions or something like that but it doesn't really matter what it's called I have one already here called customer liability and I'm gonna click on save and close so both I should have both of my items there the one sessions that goes to my income account and the prepaid sessions that's gonna go to my liability account then I'm gonna go go ahead and create all I'm gonna create one more my create a bundle so I'm gonna go to new I'm gonna create a bundle and I'm gonna call this one prepaid sessions bundle I'm actually gonna call it that you don't have to and then here under products and services I'm gonna pick my prepaid sessions account I mean item and then I'm gonna put quantity one that's fine I'm gonna actually choose that amount as I create the invoice so I'm not gonna click on this play bundle just because I want to simplify this process I'm gonna type I'm gonna call this here repay sessions bundle okay and then I'm gonna click on save and close and the reason for that is that I maybe I don't want to show the units or something like that in the invoice itself so this is gonna make sense the reasons why we created an actual bundle for this so let me create the invoice and let's say that at the beginning of the month I pick my customer and then I'm gonna select my my bundle here prepaid sessions bundle and then here where it says the individual items I'm gonna put quantity let's say I wanna sell six sessions at $30 each okay so it's a total of 180 my customer is not gonna see the breakdown all they're gonna see is a prepaid sessions bundle then they don't see a unit price which is the reason why we'd create a bundle so my customer doesn't see the unit price I see the unit price but my customer doesn't okay so I can put I can type here in the description I can put package that includes six sessions again I don't want to break him down at $30 of pop because maybe my customer will try to haggle with me and say well I'll pay you three I'll pay you for let's say that's how I want to sell it one one unit of $180 to the customer but internally is 6 units of $30 so that's why we clean the bundle so we can control inside the bundle the actual items that we want to use and then outside to the customer that you see that description but one and that 180 so I'm going to go ahead and click on save and close and and now we know that we have received six prepaid sessions if I go to my balance sheet I should now see that the liability there let me make sure that I put this on our cool basis that's always an issue with the reports and I should have $180 in my customer liability account which is the one that we're using so I owe my customer $180 until I actually consumed those so let's say during the month every week or so I'm gonna start consuming those sessions so when I click on the grey button and then let's say I don't want to invoice my customer yet so I'm going to create a delayed charge in this case a delayed charge and then let's say for example on the first week let's say on Friday of the first week I'm gonna head go ahead and select a session and then I'm gonna put one session at $30 then I'm gonna under it I'm gonna put three paid session just like that add the same quantity of one but this time will be negative 30 okay so this is gonna sear out and then basically every single time that I that I can that I want to consume that session during the week I'm gonna do this I'm going to create my session and the prepaid session just so both things are being evenly moved and let me just select my customer here which will be this one bending barn so I'm going to go ahead and click on save and close now when I go back into my report because I use a delayed charge that's not gonna affect my financial statement so let me run my my balance sheet again let me run that in a cruel basis my QuickBooks I set up for for that is this it still says 180 because the delayed charge doesn't actually apply yet now I'm gonna go ahead and create another delay charge just do it again then a charge now I'm gonna do it for the end of the following week and I'll do the same thing do one session for $30 and then zero it out prepaid session for negative 30 okay or I can do negative one and then positive 30 actually gives me the exact same effect it really doesn't matter so I'm gonna go ahead and click on save a new pick the customer of course save a new and let's say at the end of the next week and again all this stuff is happening throughout the month this is not like once a month you're doing this this is this is all happening throughout the month and you're recording each of these sessions or whatever it happens to be right the the partial service that you're doing that you sold six for and you're recording these as the month goes by just so you can kind of know and understand what's going on let me do let's say one more and that would be on the 25th perfect and then that's gonna be such I'm doing each one again replicating what I would have done every single week as a week goes by okay so I got mine so with this I should have my all my prepaid sessions consumed per se in a delayed charge let me click Save and close and then when it comes time to invoice my customer again I'm like like run report again so you can see the balance sheet has not been affected because I haven't created the actual invoice then I'm going to create my invoice at the end of the month so I'm gonna go to invoice and then I'm gonna select my customer and I'm gonna say this was gonna be at the end of the month let's say the 31st and then here on the right side you want to pay attention to the right side we see all these charges that we had every week they're netting to zero which is fine because that's really what we want to do and then we can click on add also there's a big a tall button there that we will press we click click on at all and that all these sessions now get converted into an invoice each has the service state based on the delayed charge it's got the negative and the positive that goes with it at the end of the day the invoice is zero because our customer already paid owes I remember the customer already paid us six sessions so this is gonna bring in all my teammate charges that I used just to kind of figure out what's going on with my sessions then I'm gonna click on save and close my customer doesn't owe me anything then I can go back to my balance sheet and and go back and check and click on run report and then I'll date this on the end of the month because we did that transaction at the end a month and then we click on run report and now we should only you should just have a liability of 60 you know if I actually click on that customer liability number and I group these by a product or service or something like that assuming we have more than one item this will actually keep track of them at the item level or it will also keep track of them at the customer level so this will give you the ability to break down my sales by prepaid session and then every single week or every single period that I wanna consume those those items I consumed them and they stayed delayed they don't affect my balance sheet and then when I create I didn't boys I click one button and it all gets added for me so it is a very different system than then doing it based on invoice but this is how some service companies work some service companies they want to track it per session per week per day whatever happens to be not just per lump-sum dollar amount