A common business practice, especially in the building industry, is for amounts to be withheld from contractors until the job is satisfactorily completed. This page explains how you need to record withholdings from invoices and to determine who holds retentions with or from you.
If you're after information about withheld payments from a contractor's perspective, see Receiving retention payments.
You are having new stables built to house your horses, and the total cost of the job is $125,000 including tax. You will pay this amount progressively over a five-month period. The first payment will include $25,000 less 10% of the total cost ($12,500), which is the amount you are withholding until the job is completed satisfactorily.
Note: The amount being withheld is entered as a negative amount.
- Go to the Accounts command centre and click Accounts List.
- Click the Liabilities tab.
- Click New.
- Set up a liability account called Retentions Payable as shown in the following example.
- Click OK.
- Go to the Inventory command centre and click Items List.
- Click New. Setup the item as shown in the example below. The item should be set up as I Buy This Item only. Make the linked Expense Account for Tracking Costs the Retentions Payable liability account (as created earlier in this support note). You will be presented with the following warning message: The Account for tracking costs is usually an expense account. Click OK and ignore this warning as this item is not a normal stock item and needs to be set up this way.
- When you select the Retentions Payable account, you will receive a warning regarding the type of account selected. Click OK and disregard the warning.
- Click the Buying Details tab.
- In the Tax Code When Bought field, specify GST. Note: In New Zealand versions, this will appear as the GST Code When Bought field, and specifying S15.
- Click OK.
- Go to the Purchases command centre and click Enter Purchases.
- Using an Item type bill, record both the amount being paid and the amount retained from this payment. The retainer withheld must be entered as a negative total as shown in the example below. Settle the account through either the Paid Today field or the Pay Bills function.
- Ensure the Tax Inclusive option is selected (in the top right corner of the window). Note: For New Zealand versions, this will appear as GST Inclusive.
If the work is completed on time and in a satisfactory condition, the contractor will be entitled to receive the retainer withheld. To determine the amount that has been withheld, produce the Purchases (Item Summary) report. Set the filters to the Retainer Withheld item only. Set the Purchase Status to All Bills and select the relevant date range.
Create the final Bill to record the final payment and the subsequent return of the retainer withheld determined above, in other words this is added as a positive value as shown in the example below. Settle the account through either the Paid Today field or the Pay Bills function.
You would use the same procedure described above except you would record invoices instead of bills.