What is the journal entry for Contract Retention in Contractor's books ?

What is the journal entry for Contract...

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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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Man of Kent
By Kent accountant
30th Dec 2013 00:11

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'.

Thanks (1)
Replying to charliecarne:
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By Shawn
30th Dec 2013 05:20

Hi there !

Thanks for your reply. So the complete journal entry would be:

Cash Account ...Dr. $200,000

Retention Receivables...Dr. $50,000

Accounts Receivables......................Cr. 250,000

 

Is this the journal entry that would be passed ?

 

Thanks

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By johngroganjga
30th Dec 2013 08:03

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.

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Replying to Glennzy:
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By Shawn
30th Dec 2013 11:27

Hi John !

 

Thank you for your reply. Yes, now I got it. I was trying to over-complicate things.

I  love this site now. And I'll post more and more questions.

Many many thanks again and God Bless You and Your Family

Bye

 

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Man of Kent
By Kent accountant
30th Dec 2013 10:21

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.

 

 

 

Thanks (1)
Replying to Tim Vane:
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By Shawn
30th Dec 2013 11:28

Hi there !

I am in the middle east and there is no tax at all.

Thanks

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Replying to Tim Vane:
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By Shawn
30th Dec 2013 14:51

Hi there !

I am not a practicing accountant. I am a fresh ACCA graduate (full of confusions though) and an employee in a private company and still honing my skills and knowledge.

Thanks

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By momlyn
11th Sep 2015 17:28

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?  

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