Escrow retention accounting

I am billing a company that retains $ 100.00 from every bill in an Escrow Account.
I created an Assets Account called “Company XXX Escrow Account”.
When I get paid - after I credit the company for the check received amount - I make this Journal Entry:
Accounts Receivable - Company XXX / Company XXX Escrow Account
so the bill is totally paid.
Is there a better way to handle this?
Thank you very much for the help.

I think the best approach depends on contractual terms under which the customer is escrowing funds. Is it a holdback against final inspection and/or acceptance of goods/services? When and under what circumstances will the funds be released? Who owns the escrowed funds? That is, is it truly a legal escrow with funds going into a separate escrow account and defined terms for release of funds, or is the customer doing this informally?

Personally, I do not think you should receive the entire amount of the sales invoice unless ownership of the funds has actually passed to you when they are escrowed. That would require that they be in a formal escrow account, such as an attorney might maintain, which is subject to audit. The only reason for funds to be in escrow is for convenience of settlement of unknown factors after the economic activity is substantially complete, but where there could be unanticipated adjustments to who owes what to whom. In that situation, I would establish a cash account for escrow funds. When receiving money against the sales invoice, I would make separate transactions, one to a cash account recording what you have received directly and another to the escrow account recording what the customer has deposited in its formal escrow account. The sales invoice will show as paid in full, but you won’t have to journal things around. And you will have a clear record of what the customer is holding on your behalf in its escrow account at its bank.

In any other situation, you will not have been paid in full, so you should not receive the full amount of the sales invoice. You should enter the partial payment only. Accounts receivable will continue to reflect the $100 the customer still owes you until such time as the conditions for release and payment of the funds are satisfied.

The core of what I am saying is that you should not show money received until it passes into your nominal control. I think payment being made by the customer into a formal escrow account at a financial institution, with defined requirements for release that can be satisfied by you meets that test. I don’t think anything else does. I would also consult an accountant about this to make sure you are handling any tax considerations satisfactorily.

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Perfectly explained and, I think, well understood.
I’ll have to find out more about the actual conditions & then decide.

Thank you very much for your help

Yes, when you do the Receive Money - have two account lines. On the first account line enter Accounts Receivable + Customer + Invoice and enter the full amount of the Sales Invoice. On the second account line enter the Account “Company XXX Escrow Account” and enter the retention amount as a “negative” number (minus sign in front). Now the Receive Money equals the payment received.

Its appropriate that you manage and record these transaction within your accounting system this way, as those retention amounts are no longer Accounts Receivables, but bonds held against some future performance. The Contractors in their own accounts would be highlighting them in a similar way as those amounts wouldn’t remain in their Accounts Payables.

In some cases these retentions could have a life of 2 years, therefore to have them listed in the Aged Accounts Receivables over this period would be inappropriate as they aren’t an outstanding receivable (doubtful or bad debt).

@jrenehome, I think you will see that @Brucanna’s suggestion is quite similar to my approach for the first alternative–formal accounting of escrowed funds. Financially, the two variations are equivalent. @Brucanna suggests an asset account, Customer XXX Escrow Account. I suggested creating a cash account with the same name. One reason I did that is to avoid accumulation of accounts in your chart of accounts that will persist forever (in Manager), whereas Customer XXX may not. Cash accounts can be marked as inactive, so they no longer show. Other asset accounts you create cannot be made inactive.

While not addressing my second alternative–informal escrow–explicitly, I think @Brucanna would agree that it is not wise to show the sales invoice as having been paid in full until you actually receive money. But, of course, he may have a different opinion.

My last paragraph, if not explicit enough, expressly states that it would be inappropriate to have Sales Invoices remaining with unpaid retention balances (not paid in full) within the Accounts Receivable account for the reasons provided.

Those amounts are not receivable, they have been reassigned as retentions/bonds for a set period.
Holding deposits if you like against future performance and maybe will “not” be paid

Furthermore, it would be totally inappropriate to open Cash Accounts to hold NON-CASH type transactions.

If the potential number of Retention accounts on the Balance Sheet is a concern then use the Special Accounts tab. Create “one” Balance Sheet Asset Custom Control account called “Retentions” and then create each contractor as a sub-account of that Account.

Hopefully one day, all COA will be given the “inactive” capabilities

Hello again.
If you please, I know now that the escrow is just a retention imposed by the customer so I settled for and Assets account to show the retention as a receivable until collected.
My billing is for freight service and I now buy my truck fuel from the same customer.
Now the customer, besides the “Escrow”, deducts all fuel bills outstanding from its payments.
The fuel is, of course, Operating Expenses.
Can you please tell me the best way to record this?.
Perhaps avoiding a Purchase Invoice for the fuel (which I can make if necessary)?
Thanks again for your help.

It would be best to process a Purchase Invoice for the fuel.
Then you can make a transfer between the Accounts Receivable and the Accounts Payable by using this Guide.

Perfectly clear.
Invoice the customer > Purchase invoice the customer > Journal Entry Receivable/Payable.
Now, by the same token, can I include the “Escrow” part in the same Journal Entry by Crediting the same invoice and Debiting the Assets/Receivable account I set up for the Escrow?
Thanks in advance