Handling Upfront Retainers and Deposits in QuickBooks

Dan DeLongQuickbooks Desktop, Quickbooks OnlineLeave a Comment

Many businesses require prepayment for goods or services. This is great to ensure you will be paid for the job or the materials ordered, but tracking it can be tricky. Ideally, the payment should be tracked in a way that does not report this as income until earned.

There are several ways to handle this situation, the “right” way may depend on your specific business needs. The basic steps are:

  • Create a Liability Account to track the deposit balance
  • Create an item that points to that account
  • Use that item/account in combination with transactions to handle the receiving and use of deposits

It’s important to manage the workflow, so that the accounts receivable and the profit and loss reports are accurate.

NOTE: Below is one way to handle this so that the accounting is correct. Your business may have some additional business needs and this workflow can be modified so that those needs are met. The screenshots are from desktop, but the workflow in QB Online are identical.

In order to track these prepayments, you need to create a current liability account and label it “Customer Deposits,” or “retainer”. When you make a deposit for the prepayments, you will deposit it straight to this new account.

The next step is to create an item that maps back to this new account. Go to the item list and create a service item code to map to this new account “Customer Deposits”. 

Then you will go into Customer>Create Credit Memo/Refund. Create a Credit Memo (opposite of an Invoice) to the customer for the same amount as the deposit. 

If this is done correctly, your “Customer Deposits” account will now be -0-.

Next, check your Open Invoices to see the credit balance on it.

Now your customer’s deposit is appropriately reflected. In the future when the services are rendered, it’s time to create the invoice to the client. Click Customer > Enter Invoice.

After this invoice is created, we need to apply the deposit. QuickBooks will recognize there is a prepayment or you can select the button at the top to apply credits.

After you select the correct prepayment entry, click done. When everything is applied properly, your accounts receivable will look like this:

This example can be used the same way for different things such as a deposit for a product sale. This allows the cash to be received and the invoice prepared at a later date. You can continue to add more of a deposit to your customer’s account and keep a running balance of available credit to apply to their purchases. At any given time, you can see how much is left by looking at the negative balance in their accounts receivable account.

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