Accounting for advance retainers received

[CuriousEL]

Hi All

After a lengthy discussion with fellow mates something simple has now turned to complicated

My issue is how do you properly account for advance retainers in your accounting books. My client needs an INVOICE for Retainer in order to make a payment but this is not a sale. Because it's an unearned income it's recorded as a liability.
I want to EXCLUDE the Retainer from Income but how do I do this??

[Dave A]

I have created an invoice line item for Deposits Received in Advance, which posts to a Current Liability account.

(Just in case -) Obviously you do not involve VAT in the line item.

[CuriousEL]

Thanks Dave

My situation is the following..The client needs an invoice for the retainer fee. My problem is when I do an invoice it will show in the sales ledger. I don't want it to reflect as a "sale". The only invoices to the clients should be for services rendered then set it off against the Retainer..

What happens now is that the client receives an invoice for the "monthly retainer". We receive the payment and is match to the invoice to clear the account. The current liability remains unchanged which should not be the case.

[Dave A]

In my set-up, at an appropriate time I'll pass a credit note with the same line item to reverse the "pay in advance" invoice and recover the prepayment from the Current Liability account, which credit in turn would be used to settle invoices for services rendered.

My problem is when I do an invoice it will show in the sales ledger. I don't want it to reflect as a "sale".

We'll, it won't be posting to an income account. It's just a timing issue. If it really bugs you, pass the credit straight away and the timing effect on the sales ledger will be negated.

The whole issue of prepayments can be fraught with irritations. I find having the money in the bank before I start rendering the service does ease the pain a little, though.

If you want to go digging for trouble, take a close look at when a VAT liability is supposed to be incurred

[CuriousEL]

Brilliant..this helps thanks Dave

[sterne.law@gmail.com]

There are some complexities when getting deposits.
There is the asset and the liability, plus on payment, the reduction of one liability and swop of one bank to another,, plus reduce the debtor etc, ect.
Your real challenge is that they want an invoice.
If it is a deposit it is supposed to go into a separate bank account (not necessarily a trust account).
If you know what work will be performed it would be easier, just invoice for the work, in advance and take the money.
If you don't know the actual work, then the passing of credit is the only real way.
Once a sale is made all the VAT and tax implications are triggered, so the credit is important.
But, this alos opens the door to possible skulduggery so be careful.