Last week’s covered the topic of Customer Deposits using QuickBooks Online’s built-in Deposits tool, but that feature records those deposits as Income instead of a Liability. Most of the time Customer Deposits paid against future work should, according to standard accounting practices, be recorded as Unearned Revenue until the work is completed. This week we will look at the workflow for setting up this type of Liability tracking and recording Customer Deposits accordingly.
This method of managing Customer Deposits on work to be performed enters the Deposit in QBO as a retainer, and not as an initial payment on the work. Doing it this way temporarily holds the money on the Balance Sheet in a separate Deposits Received Other Current Liability account. When the project is paid for, the retainer amount is moved onto the Profit and Loss statement as Income.
QuickBooks Online users can easily see all the money that is being held for different Customers until each Job gets completed. Double-click on the Deposits Received liability account on the Balance Sheet report, then group it by Customer! Periodically reconciling this account also ensures that Customer Deposits are being applied correctly.
Proper Set-up for Recording Retainers as Liabilities
There are two steps involved to set up Deposits on work to be performed. These only need to be done the first time.
1) Create the Liability Account in the Chart of Accounts
- Go to Accounting > Chart of Accounts > New.
- Create an Other Current Liability account (as shown in example below).
Create an 'Other Current Liability' type Account for (Client) Deposits (Retainers) Received...
Alicia-P_Series-2_Lesson-10_Fig-01
2) Create the Deposit Received item in the Products & Services List
- Go to Sales > Products and Services > New.
- Create this new Service item (as shown in the example below). You can modify the wording to suit your business needs.
Create a Service 'type' item in QuickBooks Online that is similar to the one shown here, your exact terminology may vary based upon the specific needs of your business (such as Customer Deposits, Customer Retainer, Deposit Received, etc.)
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When setting up this new Service be certain to use the new Liability Account as the Income account. This way, when using this Service on an Invoice or Sales Receipt, the money will be held in this Account on the Balance Sheet.
Receiving Customer Deposits using this Retainer Method
Now let's look at the steps in taking the Retainer Deposit on Work to Be Performed. We have two more steps to finish up this process.
3) Record the Deposit
- If you have already received the client money, go to +New > Sales Receipt. If you are Invoicing the client for this Deposit, use +New > Invoice.
- In the Product/Service field, choose your new Deposit Received item. Enter the amount of the Deposit (as shown in the example below).
Use the newly created Service item on the Sales Receipt to record the Retainer being received for Deposit.
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When you now look at the Balance Sheet, you will see the the retainer amount is being held on behalf of the Client. Click on the dollar amount to see all the Deposits you’re holding on all open your Jobs.
Liability section of the Balance Sheet showing the Deposit Received Account within the Other Current Liabilities (type) accounts.
Alicia-P_Series-2_Lesson-10_Fig-03-B
4) Deducting the Client Retainer from the Project's Balance
- When it’s time to bill the Customer for the entire job (or a phase of it), add the same Deposit Received item at the bottom, but this time subtract the dollar amount to show the remaining balance to be paid (as shown in the example below).
Enter an amount equal to the Customer's Deposit (Retainer) as a 'negative' on your Invoice using the Deposit Receive/Retainer Item to clear the prior amount from the Liability Account.
Alicia-P_Series-2_Lesson-10_Fig-04
On the Balance Sheet, the dollar figure has zeroed out. Click on the total to look at the Deposit Received sub-report, and you will be able to see this clearly (as shown in the report illustrated below).
Transaction report showing details of Deposits Received Current Liability Account shows the 'in' and 'out' relationship of the retainer transactions.
Alicia-P_Series-2_Lesson-10_Fig-04-B
At this point, the dollar figure will now be distributed to the proper Income accounts on the Profit and Loss report via the other line items on the Invoice.
Lesson Wrap-up
Tracking unearned revenue is vital when the money you are holding actually belongs to your customer until you have finished a job, or a prescribed portion of a job. It's vital to understand how to properly manage deposits on work to be performed, so you don’t overstate your income and understand your liabilities.
If you're having trouble with this topic then consider taking some additional training that I have available at Royalwise Solutions. By the way, Insightful Accountant and I have a co-sponsored webinar titled, QuickBooks® Online Banking which will cover bank accounts in QuickBooks, importing and matching bank feed transactions, categorizing expenses, attaching receipts and much more. You can join us for that webinar on April 22 at 12:00 p.m. Eastern by Registering Here.