Month-End Retainer Accounting Checklist for Professional Services: Cash Is Not Revenue

Month-End Checklist: Retainer Accounting for Professional Services

A large retainer payment lands in your bank account. It’s a significant win that secures a client relationship and improves your cash runway. But as you prepare your month-end reports, that cash creates a critical question: how much of it is actually revenue? Misstating this figure can skew your financial health, mislead investors, and create compliance headaches. For a professional services startup, mastering retainer accounting is fundamental to building a scalable, trustworthy business. This checklist provides a practical workflow for managing client deposits correctly, helping you understand how to calculate retainer liabilities at month end and ensure your financials are accurate.

Foundational Understanding: The One Rule That Matters

Before diving into any workflow, every founder must internalize one core principle of accounting: Cash is not revenue. The money in your bank account represents what you have on hand, but revenue represents what you have earned by delivering a service. Until you perform the work promised, a client's retainer payment is not yours. It’s a liability.

This liability is called 'Unearned Revenue' or 'Deferred Revenue' on your balance sheet. Think of it as an IOU to your client. You owe them services for the cash they paid you upfront. Recognizing revenue is the process of converting that liability into income as you fulfill your obligation. This process is governed by standards like ASC 606 in the US and IFRS 15 internationally, which exist to ensure revenue is reported consistently and accurately.

There are two primary retainer models, and how you earn the revenue differs significantly for each.

• Advance Against Future Work (Drawdown): This is the most common model. A client pays a lump sum, and you deduct your fees for hours worked or deliverables completed from that balance. You recognize revenue only as you perform the work. Any remaining balance at the end of the month is a liability.
• Access or Availability (Use-it-or-Lose-It): In this model, a client pays for guaranteed access to your team for a specific period. You typically recognize this revenue evenly over the contract period, regardless of usage. For example, you would recognize one-third of a quarterly retainer each month. Your contract must state this clearly; otherwise, it defaults to a drawdown model.

Your Month-End Retainer Workflow: A Step-by-Step Guide

Turning client deposits into accurate financial statements requires a disciplined month-end process. Inaccurate matching of billed hours to retainer drawdowns is a primary cause of client disputes and unexpected cash gaps. Here is a step-by-step workflow designed for startups using tools like QuickBooks or Xero alongside spreadsheets for detailed tracking.

Step 1: Record the Initial Cash Payment

When you receive a retainer payment, it does not touch your income statement. The entry is purely on the balance sheet, reflecting an increase in cash and an equal increase in obligations. In your accounting software, you will record a transaction that increases a bank asset and a liability account.

• Debit: Cash (or your specific bank account)
• Credit: Unearned Revenue (a current liability account you may need to create)

For a $15,000 retainer, this entry correctly shows you have $15,000 more in the bank but also a new $15,000 obligation to your client. Your net worth has not changed.

Step 2: Track Work and Calculate Earned Revenue for the Period

This is where the process often breaks down without a system. You must have a reliable method for tracking the work performed against each retainer. The reality for most early-stage startups is that getting the process right is more important than having the perfect tool. For companies with fewer than five active retainers, a well-structured spreadsheet is often sufficient.

Your tracking sheet should include these key columns:

• Client Name
• Retainer Start Date and Amount
• Opening Balance for the Month
• A log of services delivered (e.g., date, task description, hours worked)
• Calculation of Earned Revenue for the month (e.g., Hours x Rate)
• Closing Balance for the Month (Opening Balance - Earned Revenue)

At the end of the month, sum the value of all work delivered for each client. For an 'Access' retainer, the calculation is simpler: it's a straight-line portion of the total fee (e.g., $15,000 quarterly retainer / 3 months = $5,000 per month).

Step 3: Make the Adjusting Journal Entry

This is the most crucial step in the month-end accounting checklist. This entry moves the amount you earned from the liability account on the balance sheet to a revenue account on the income statement, officially recognizing it as income.

Let's say you delivered $6,000 worth of services against the $15,000 retainer. The adjusting journal entry is:

• Debit: Unearned Revenue ($6,000)
• Credit: Service Revenue ($6,000)

This single entry correctly reduces your liability and recognizes the income you've earned. In QuickBooks, you create this by navigating to '+ New' and selecting 'Journal Entry'. In Xero, this is done under 'Accounting' and then 'Manual Journals'.

Step 4: Reconcile, Report, and Communicate

After posting the journal entry, your Unearned Revenue account balance in your accounting system should exactly match the sum of all outstanding retainer balances from your tracking spreadsheet. This unearned revenue reconciliation is a critical control that confirms your numbers are correct.

Your updated balance sheet will now show a remaining liability of $9,000 ($15,000 - $6,000), and your income statement will show $6,000 in new revenue. This provides accurate retainer balance reporting for internal analysis and external stakeholders. For client transparency, consider sending a monthly statement showing the retainer's opening balance, work completed, amount drawn down, and the closing balance. This practice builds trust and preempts questions.

The Overlooked Landmine: Sales Tax and VAT on Retainers

Overlooking jurisdictional tax rules can expose your company to penalties. The rules for when you owe tax differ significantly, centered on a concept called the 'tax point', which is the moment a transaction becomes subject to tax.

For US Companies (Sales Tax)

While rules vary by state, a common principle applies to services. In many US states, sales tax is due when the service is rendered, not when cash is received. This aligns with your revenue recognition. If you earn $6,000 from a retainer in a month, you are generally obligated to calculate and remit sales tax on that $6,000 portion for that period. You would not typically owe tax on the full cash payment upfront. However, rules are complex and state-specific, so consulting a local tax advisor is essential.

For UK Companies (VAT)

The rules in the UK are stricter and can create a cash flow pinch. The 'tax point' is triggered by the earlier of the invoice date or the payment date. This means VAT is often due on the entire retainer payment upfront. If you issue a VAT invoice for a £15,000 retainer and receive payment on March 15th, the entire VAT amount (£3,000 at 20%) is typically due with your VAT return for that quarter, even if you have not earned any of the revenue yet. Businesses must have the discipline to set this cash aside immediately. For specific guidance, see resources on Client Deposit Accounting: UK GAAP Compliance.

Practical Takeaways for Managing Client Deposits

Managing retainer accounting correctly comes down to process discipline. It provides a true picture of your company's performance and is a key part of good financial management. Here are some professional services accounting tips to implement.

Systematize Your Tracking

Whether it's a spreadsheet or a dedicated tool, you must have a single source of truth for how much of each retainer has been used. This is your primary defense against client disputes and the foundation for your month-end journal entries. The question of how to track client retainers effectively is one every service business must solve early.

Separate Cash Flow from Performance

Train yourself and your team to view the income statement, not the bank balance, as the true measure of monthly performance. A high bank balance can mask poor delivery or an upcoming revenue cliff when existing retainer work runs out. This mental separation is key to managing client deposits responsibly and making sound business decisions.

Clarify Retainer Terms in Your Contracts

A scenario we repeatedly see is ambiguity in contracts leading to financial disputes. State explicitly whether a retainer is for drawdown against future work or for access and availability. Clear terms set client expectations and dictate your revenue recognition method. A simple clause can prevent significant headaches.

Prioritize Tax Compliance and Cash Management

The difference between US sales tax (often on earned revenue) and UK VAT (often on cash received) is not a minor detail. This distinction has direct cash flow implications. Map out your obligations based on your jurisdiction and ensure you are setting aside the required cash to meet tax payments, especially if you operate under a VAT regime. For a deeper dive, explore our hub on Client Deposits & Retainer Accounting.

Frequently Asked Questions

Q: What happens if a client cancels a retainer mid-period?
A: Your contract should dictate the terms. Typically, you would recognize revenue for all work completed up to the cancellation date. Any remaining unearned portion of the retainer may need to be refunded to the client, unless your contract specifies that it is non-refundable. This makes clear contract terms essential.

Q: How do I handle retainers that roll over month to month?
A: The accounting process remains the same. The closing balance of one month becomes the opening balance for the next. Your month-end adjusting journal entry will still only reflect the revenue earned in that specific month, ensuring your liability on the balance sheet is always accurate.

Q: Can my accounting software track retainer drawdowns directly?
A: Some accounting platforms like QuickBooks Online have features to manage retainers or client deposits. However, they may lack the detailed project-level tracking needed for complex service delivery. Many firms start with a spreadsheet and graduate to dedicated project management or professional services automation (PSA) software.