About Retainage (Holdback) Accounting

If you use retainage accounting in Accounts Payable, Purchase Orders lets you account for retainage (or a holdback) that occurs when you withhold a percentage of an invoiced amount, usually by mutual agreement or according to a statute (such as a Builders Lien Act).

Note: You can only specify retainage if you are using Project and Job Costing and the transaction is job-related.

Before you can process retainage in Purchase Orders, you must:

  • Select the option to use retainage accounting on the Processing tab of the A/P Options screen.
  • Specify default retainage settings for vendors on the Retainage tab of the A/P Options screen.
  • Specify a retainage control account for each account set in your Accounts Payable system.
  • Set up contracts in Project and Job Costing.

There are three steps in processing retainage:

  1. Process a receipt, invoice, debit note or credit note that specifies a holdback (retainage) for the document.
  2. Transfer the invoice or debit note with the retainage to Accounts Payable and post it in that program.
  3. Later, post a separate retainage invoice, debit note, or credit note to invoice the outstanding retainage amount.

Entering Original Documents with Retainage

An invoice, debit note, or credit note from which retainage is taken is called an original document.

You enter the receipt, invoice, debit note, or credit note using the standard P/O entry screens. To indicate that retainage applies to the document, however, you select the Job-Related option and the Retainage option.

Note: The Retainage option appears only if you selected the Retainage Accounting option for your Accounts Payable system.

The program then displays the Retainage tab for the entry screen, where you can specify:

The program uses the retainage percentage to calculate the retainage amount.

You can enter a different retainage percentage in the Retainage Percentage (%) field. When you enter a new percentage, the program recalculates the retainage amount.

The program uses the retention period to calculate the due date for the retainage document. When you change the retention period, the program recalculates the retainage due date, and vice versa.

You use this field to specify how the exchange rate is determined for the retainage document. You can choose one of the following:

  • Use Original Document Exchange Rate. Use the same rate as the document you are processing.
  • Use Current Exchange Rate. Use the rate that is in effect when you process the retainage document.

You can use different terms for retainage documents (used to process invoices for outstanding retainage) than you used for the original document from which the retainage was taken.

The program displays the code specified for retainage terms in the vendor record, but you can change the retainage terms for a document, if you wish.

Note: All tax amounts are included on the original retainage document. No tax amounts are included on the retainage invoice, debit note, or credit note that you process to clear the outstanding retainage amount.

Posting original invoices, debit notes, and credit notes

When you post the original retainage document in Accounts Payable, the program deducts the retainage from the document total, and posts the amount to the retainage control account.

For example, if you enter an invoice for $10,000 with 10% retainage, an invoice is posted for $9,000 with retainage outstanding of $1,000.

The retainage amount remains in the control account until you invoice it in accordance with:

Adjusting Original Documents

Use Adjustment Entry in Accounts Payable to change retainage related to existing invoices, debit notes, and credit notes. When you post the adjustment, the program adjusts the outstanding retainage account.

Note that Accounts Payable does not calculate any retainage on adjustment transactions. You must enter the retainage manually, whether you are adding it for the first time, or adjusting existing retainage debits or credits.