The word retainer is most often associated with the law profession. But businesses that provide ongoing professional services use retainers as well. For example, attorneys, accountants, financial advisors, and technical support companies, to name a few, collect retainers. A retainer can be more specifically defined as an amount of money that acts as a fee pre-payment. If it is not entirely used, it is refunded to the client.
As the work is performed, invoices are sent and money collected which is retrieved from the retainer. If the invoice amount exceeds what is left in the retainer, you must collect another retainer fee from the client. If this is a common way for you company to conduct business, it is advisable to open up a separate bank account to hold the retainer funds. Preferably an account that earns interest like a bank savings account or better yet, a money market account. Make sure the total amount of retainers matches the balance in the bank.
To track retainers, create a liability account titled “retainers.” When a client gives your company a retainer, enter this amount as a deposit under the retainer account. A good rule of thumb to keep in mind is “(m)oney you received as a retainer becomes spendable when you earn it” (Accounting Savvy for Business Owners p.112).
At the time you receive payment with the sent invoice, you apply this amount to your income account. Reduce this amount in the retainer account with a line item “applied from retainer.” If the amount exceeds the money in the retainer account, simply issue another invoice for the remaining amount due. You don’t post an amount to Accounts Receivable if there is enough money in the retainer because you are not awaiting payment from the client.