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wfbrbutch
February 14, 2019
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Cash income reflects total amount of invoice including amount withheld for retainage.

  • February 14, 2019
  • 3 replies
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Contractor Edition; Ex., Total invoice for $50,000 less Retainage $5,000= $45,000. Retainage is sent to an asset account until invoiced. Payment received is $45,000.  P&L on Cash basis shows the total amount of $50,000 as income. Why? This is incorrect. Any suggestions?

 

    Best answer by Malcolm Ziman
    @wfbrbutch wrote:

    Contractor Edition; Ex., Total invoice for $50,000 less Retainage $5,000= $45,000. Retainage is sent to an asset account until invoiced. Payment received is $45,000.  P&L on Cash basis shows the total amount of $50,000 as income. Why? This is incorrect. Any suggestions?

     

    I at first though you meant that you received a "retainer" in advance, but I think you meant that the customer withheld $5k from their payment and they still owe you that amount. 

     

    If so I agree that your cash basis income s/be $45k and not the full $50k.

     

    I believe the problem may be the way you recorded this: "Retainage is sent to an asset account until invoiced."

     

    There is no reason to send anything to an asset account. You already have a balance in AR (which is an asset) of $5k. So if you send the $5k to an asset account, you are duplicating the asset.  

     

    You don't say how you sent the Retainage to an asset account, but whatever you did it is being picked up as income.  If you delete this transaction - which you should do anyhow because it creates duplication - then you should have cash basis income of $45k

     

     

     

     

     

     

    3 replies

    A
    Anonymous
    February 15, 2019

    This is happening  because "Retainage is sent to an asset account" so the amount of the retainage item will never appear on your P&L until you remove it from the asset account and shift it to income (negative income.)

     

    You can do this directly on the invoice once it is paid or on another sales transaction such as another invoice or a sales receipt.

     

    To do this, reverse the retainage item first used on the invoice and then add an item that uses an income account.  These items will cancel each other out for the invoice total.

    qbteachmt
    qbteachmt
    February 15, 2019

    You need to know if your retainage is treated as a reduction of Income or as an Asset. You link it to the type of account that applies for your Accounting requirements. And later, you will Invoice using only the Retainer item. That means:

     

    If this is a Cash Basis entity, the use of the Retainer item (linked to income) negative on the actual sale first reduces Income on that sale; later, it is New income when you charge the customer for it.

     

    Or, as an Accrual Basis entity, the use of the Retainer item (linked to Other Current Asset) negative on the actual sale first creates An Asset that is in lieu of Funds. This is what you have right now = the Retainer is instead of them having to pay All the Money. Money is an asset and you parked some value as Other Current Asset. Then, later, you invoice for the Retainer, which is basically, Moving the retainer amount out of that Other Current Asset to show that now you anticipate actual Funds for it.

     

    Nothing here is wrong, except your understanding of where to see how this info reports. Make sure your entity is Allowed to hold this as Other Current Asset, in the first place.

    W
    wfbrbutchAuthor
    February 15, 2019

    I understand. However, it is not cash income until it is invoiced. It is still shows up as cash income on the P & L; it again shows up when it is invoiced and paid.  Taxes reported on Cash basis. Receipt of payment may not be for over a year. Then it is reported again when received. 

    M
    Malcolm Ziman
    February 16, 2019
    @wfbrbutch wrote:

    Contractor Edition; Ex., Total invoice for $50,000 less Retainage $5,000= $45,000. Retainage is sent to an asset account until invoiced. Payment received is $45,000.  P&L on Cash basis shows the total amount of $50,000 as income. Why? This is incorrect. Any suggestions?

     

    Did you receive the Retainage in a time period outside or inside of the time period of the P&L ?

    qbteachmt
    qbteachmt
    February 17, 2019

    @Malcolm Ziman

     

    This doesn't matter to the question: "Did you receive the Retainage in a time period outside or inside of the time period of the P&L ?"

     

    When you treat Retention as Asset, they created Gross income, and showed they are not expecting that total as Funds. Yes, the Gross Sale is going to show. I know you sometimes struggle with Cash vs Accrual Basis, so let's simply review the Accounting behind the scenes of their invoice:

    Income item $5,000 Credit to Income

    Invoice = Debit to AR. The Debit is in lieu of Funds. If this was a Sales Receipt, that Debit would be the Funds, as cash or bank or to the Undeposited Funds account.

     

    Now let's put a Retainer Item on the invoice using Negative value, or on a credit memo. Either is the Same event = this item linked to Asset, using negative value, = Debit to Asset. Think about this as Equivalent: the invoice Debits AR, a type of Asset. They essentially Split the total AR, splitting a portion to a different Asset = Retention.

     

    Also, notice this never changed the Income. They now have:

    $5,000 Gross Income

    $1,000 diverted as Other Asset (Retention)

    $4,000 as AR

    And later, they invoice for the retention. That will:

    Debit AR and Credit Retention asset

    In other words, they cleared one Asset by moving it to another (AR). Now we get Funds, which = Asset. This also never hits Income.

     

    This is why a Cash Basis entity never holds Retention as Other Current Asset; it is going to reduce income when you list it as negative. It is going to be income later, when you invoice for it. It does this because your Retention item is linked to Income, not Other Current Asset.

     

    They know what they wanted, but their Concept for the setup is wrong.

    M
    Malcolm Ziman
    February 17, 2019
    @qbteachmt wrote:

    I know you sometimes struggle with Cash vs Accrual Basis.

    I am not a psychologist but I believe this is called Personal Inadequacy Redirection

    M
    Malcolm ZimanAnswer
    February 17, 2019
    @wfbrbutch wrote:

    Contractor Edition; Ex., Total invoice for $50,000 less Retainage $5,000= $45,000. Retainage is sent to an asset account until invoiced. Payment received is $45,000.  P&L on Cash basis shows the total amount of $50,000 as income. Why? This is incorrect. Any suggestions?

     

    I at first though you meant that you received a "retainer" in advance, but I think you meant that the customer withheld $5k from their payment and they still owe you that amount. 

     

    If so I agree that your cash basis income s/be $45k and not the full $50k.

     

    I believe the problem may be the way you recorded this: "Retainage is sent to an asset account until invoiced."

     

    There is no reason to send anything to an asset account. You already have a balance in AR (which is an asset) of $5k. So if you send the $5k to an asset account, you are duplicating the asset.  

     

    You don't say how you sent the Retainage to an asset account, but whatever you did it is being picked up as income.  If you delete this transaction - which you should do anyhow because it creates duplication - then you should have cash basis income of $45k

     

     

     

     

     

     

      W
      wfbrbutchAuthor
      February 18, 2019

      Thanks Malcolm,

      You explain much better. Now I know how to workaround.

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