Recording customer retainers and deposits in QuickBooks Online
QuickBooks Online treats a customer retainer as a liability, not income; here is the full UK workflow, including the credit memo step that clears it.
Take money from a customer before the work starts, and QuickBooks Online will treat it as income the moment it lands. For UK businesses working with retainers and deposits, that single default sits behind the questions we see most often on the community boards: profit reports that look healthier than reality, VAT returns picking up money the business does not yet own, and invoices that double count the deposit. The software does support a proper retainer workflow. Most of the confusion comes from the last step, which is nothing like the obvious one.
The problem in plain terms
A retainer is not your money yet. Legally and for reporting purposes, you are holding funds on the customer’s behalf. QuickBooks Online (UK edition) therefore wants that money parked in a liability account, then released to income only when you invoice for the work. Skip the liability setup and the deposit inflates sales on the profit and loss report. Set the liability up but miss the release step, and you get the opposite: a balance that climbs forever and never clears.
Set up a liability account first
Everything hangs on one account. Open the Chart of Accounts from the Accounting menu and create a new account. Set the type to Current liabilities and choose the client trust account detail type, which exists for exactly this purpose. Give it a name you will recognise, pick a default VAT code, and if you are already holding older deposits, enter the unpaid balance and the date it applies to. Save it and move on.
Give the retainer its own item
Next, create a service item under Products and Services in the Sales and Get Paid section. Name it something obvious, Retainer works, and this is the important part: set its income account to the liability you just created. That mapping is what steers the money away from turnover. When the item sits on a sales receipt, the receipt credits the liability instead of income, which is the entire point.
Where the money actually sits
Ask a second question: does the deposit live in a separate client account at the bank, or does it sit in your main current account? If you hold client money in a dedicated trust account, create a matching bank account in QuickBooks with the cash at bank type and the client trust account detail type. If the money simply mixes with your operating funds, skip this. The books should mirror reality, not an idealised version of it.
Taking the money in
When the deposit arrives, raise a sales receipt using the retainer item. The bank balance rises, the liability rises, and income stays untouched. If you prefer to bill the deposit first, an invoice with the same item does the same job once the payment is received. Either route is fine. What matters is that the retainer item, not an ordinary income item, does the posting.
The step most people get wrong
Here is the trap. When the work is done, you invoice for the services in the normal way, using your regular income items. The instinct is to add the retainer item to that invoice as well. Do not. That credits the liability a second time, so the deposit now sits in the account twice and the balance never comes down.
The correct route is a credit memo. Create one for the customer, add the retainer item to it, and the memo debits the liability, releasing the money from trust. Apply the credit to the service invoice. The invoice shows as partly or fully paid, the liability drops, and the income is recognised exactly once, in the period the work was billed. Where you do not need the credit tied to a particular invoice, a journal entry debiting the liability and crediting income achieves the same result.
What happens to VAT?
Advance payments carry a VAT wrinkle. HMRC generally treats the date you receive the money as the tax point, not the date of the later invoice. Because the retainer sits in a liability, QuickBooks will not surface it on your VAT return on its own, so check the VAT code on the retainer item and on the sales receipt, and account for the VAT when the cash arrives if that is how your returns are prepared. Treatment varies with what the retainer actually covers, so this is one to confirm with your accountant.
A balance worth watching
Once the workflow is in place, the liability balance should always equal the deposits you are holding right now. If it only ever grows, the credit memo step is being missed. If it dips below zero, credits are being applied twice. Either way, that single number is the quickest health check on the whole arrangement, and it takes seconds to review on the balance sheet.