I have an invoice I created for service and a retainer account for my client. $500 for service, and $500 for the retainer portion. The service portion is tied to sales income, the retainer portion is tied to a liabilities retainer account.
The funds I received were a $250 deposit towards the service and the full $500 towards the retainer. When I receive the funds its allocating $375 for the service and $375 for the retainer, which is not correct. I deleted the payment so the invoice is sitting unpaid now.
What did I do wrong, how do I correct it, and why is it doing this?
I deleted the original invoice and re-entered it. I was using cash but change it to accrual. Re-received the funds and all is correct now. Did not think to look at what cash vs. accrual was doing to my accounting. Your questions answered my questions. I guess with cash accounting it split the funds 50-50.
Yeah, under cash-basis. When receiving a payment against invoice, the payment will be applied proportionally across all line items. If this is not what you want, you will need to issue two sales invoices instead of one. Then you can apply $500 against invoice #1 and $250 against invoice #2.
There are other considerations, too, @ksh. First, remember the IRS expects you to stick with the reporting method you first use unless you go through a rather laborious process of requesting a change. (Even though a standard cash/accrual or vice versa switch is automatically approved, the form is many pages and may require accounting adjustments.)
Second, realize that under cash accounting, the retainer payment must be reported as income. Under accrual, it would not be until you invoiced against it, possibly in a later tax year. In fact, your approach of accounting for the retainer under a prepaid deposit liability account isn’t really correct for cash accounting. Nor should you actually have invoiced for the retainer, because you didn’t earn the money yet. That’s one reason companies use accrual accounting as they get more sophisticated.
When I first started using Manager I didn’t realize I had the cash vs accrual option. The accrual is definitely what I should be using. The retainers I get from clients are never income for me, initially. They are collected to purchase the items needed for a clients project: furniture, rugs, etc. I may collect 2-3 retainers per job type, usually in $500 increments. As I consume these funds, I have created Purchase Invoices to receive funds allocated to that retainer liability account. The client is given a Sales Invoice to collect those retainer funds. Those transactions have all been running very smoothly and going to the correct accounts. When the projects is 100% completed and final invoiced out, I then take the small portion of the retainer accounts that are left and make a journal entry to close that balance out to my income - markup/commission account. Sound correct?
This is not correct. Purchase invoices record money you owe to suppliers, not money received.
This is not correct accounting practice either. A sales invoice records the customer’s obligation to pay you income you have earned. A retainer does not reflect any earned income. That’s why it goes into a prepaid retainer account under Liabilities. If the client decided not to move forward, you would owe all that money to the client. A sales invoice should be created when you have actually performed a service, such as developing a room design. Because the customer has prepaid, you can transfer an appropriate portion of the retainer to Customer credits, where it will automatically be applied to the sales invoice.
No. The remainder of a retainer belongs to the customer and should be returned via Spend Money, allocating the transaction to the retainer account.