Billing and Revenue Recognition With Retainers
The following scenario shows the entries made when you bill clients and recognize revenue using retainers. A retainer is setup for $12,000 and billed to the client and $15,000 in expenses is billed and revenue is recognized.
| GL Transactions | AC Transactions | |||
|---|---|---|---|---|
| Accounts Receivable | ||||
| Debit | Credit | |||
| 12,000(1) | ||||
| 3,000(4) | ||||
| Billed/Unearned | Billed/Unearned (c) | |||
| Debit | Credit | Debit | Credit | |
| 12,000(1) | 12,000(1) | 12,000(1) | 12,000(1) | |
| 5,000(3) | 5,000(2) | 5,000(3) | 5,000(2) | |
| 10,000(5) | 7,000(4) | 10,000(5) | 7,000(4) | |
| 3,000(4) | 3,000(4) | |||
| Revenue | Revenue (p) | |||
| Debit | Credit | Debit | Credit | |
| 5,000(3) | 5,000(3) | |||
| 10,000(5) | 10,000(5) | |||
| Retainer | Retainer (c) | |||
| Debit | Credit | Debit | Credit | |
| 5,000(2) | 12,000(1) | 5,000(2) | 12,000(1) | |
| 7,000(4) | 7,000(4) | |||
Transaction 1 (1)
The billed/unearned amount of $12,000 is credited, as would happen in normal billing, but then is immediately relieved and the amount is reclassified to the retainer account. This is a two-part entry in the same routine ending with a debit to Accounts Receivable and a credit to the retainer account.
Transaction 2 (2)
This entry bills $5,000 in services. The billed/unearned account is credited and the retainer amount is debited.
Transaction 3 (3)
This entry recognizes the $5,000 as revenue. Since the billed amount has been recognized, the billed/unearned balance is cleared.
Transaction 4 (4)
This entry bills the client for $10,000. The retainer amount of $7,000 is reduced to zero and Accounts Receivable is debited for the amount over the retainer balance ($3,000). The billed/unearned amount is credited for the full $10,000.
Transaction 5 (5)
This entry recognizes revenue for $10,000. This transaction credits revenue and debits billed/unearned (because billing occurred in advance of recognition), leaving $15,000 in revenue and $15,00 in receivables. Everything else balances to zero.