Hi there !
When the contract bills the contractee (the principal, for whom the contract work is being done), he passes the following journal entry::
Accounts Receivables....Dr. 250,000
Billings on Construction in Progress...Cr 250,000
Now if the contractee has retained 20%, and has paid the rest in cash, what would be the journal entry for this ?
Thank you for your help.
Replies (8)
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Debit
Retention debtor
Credit accounts receivable
Depending on the retention release date the retention debtor may be due after one year.
This also requires you to consider whether the retention value included in sales needs to be transferred to creditors - deferred income as it is not yet due.
Bear in mind that plenty of contractors don't invoice retention until it is due and account for it 'off balance sheet'.
You don't need a journal entry at all unless for book-keeping purposes you want to keep retentions separate from other accounts receivable. The retention will simply be the balance sitting on the customer' sales ledger account after he has paid 80% of the invoice you have posted to that account.
Normal procedure
@Shawn - are you sure the 20% retained is retention and not CIS tax - does your client have net or gross CIS status?
A 20% retention is extremely unusual.
What type of contract is your client working under?
Does he submit applications for payment rather than invoices?
If this is the case, normal process is for your client's client to issue a certificate for payment which will usually state an amount to be paid, net of retention and inclusive of vat.
Your client would then record this net amount as his sales figure.
Retention would then be invoiced at the appropriate date, dependent on contract terms - 12/24 months later.
if your client raises an invoice rather then there will be vat implications associated with this if part of the payment (the retention element) is not due for 12 months +.
In this instance you can either leave the balance on the accounts receivable ledger (as John suggests) or move the balance to a retention account.
I would still question why your client would invoice the gross amount including retention.
Retention entry
I have the same question, please someone share me about this - if the contract is 3Million and the retention fee is 10% what would be the entry for this?