Retention payments and how to account for them

1. Advance payment of GST & Income taxes due to incorrect accounting where the retention amount is recorded as part of the total sales invoice, and the customer pays the invoice less the retention amount resulting in an outstanding amount on the sales invoice. This means inadvertently income tax may be paid on this income as your tax return must be prepared on an accrual’s basis.
   If you are on a c
2. asor GST there will be no impact, but if you are in an accrual’s basis for GST, you will also pay GST on income that you have not received and may not receive for a long time, again causing unexpected cash flow challenges.
3. No recordin g
system to ensure collection of the Retention which has meant the collection of the retention payment has been overlooked, sometimes it can be too late, and the customer is not usually going to proactively advise you that they owe money.

Answer
We have two approaches we recommend, depending on your situation and how you wish to see the retention in your accounting records. Both result in the same overall outcome however some clients have a preference as to how the invoices are recorded, and therefore accounting for the retention amount.

Client wants an invoice for the project amount EXCLUDING the Retention

This is when your client wants an invoice for the final project payment excluding the retention amount. We don’t want you to forget about the retention!

Firstly you issue the invoice to the client, say the final project invoice was $100,000 and the retention was 10%, then the invoice would be issued as $90,000. You show the retention on the sales invoice as two line items and the client pays the $90,000

Your sales invoice use two lines in the invoice and record to these accounts

Construction Revenue Account (PL)       $90,000

Retention (PL)                                       ($10,000)

TOTAL INVOICE                                     $90,000