Professional Services Bookkeeping: Retainers, Unbilled Work and Receivables#
A consultancy, agency, law practice or design studio sells time and know-how, not stock. The bookkeeping problem is timing. Work is done in one month, billed in another and paid in a third. A retainer is paid before the work is done. Reimbursable expenses are spent before they are billed. If these are not tracked, the profit and loss and the receivables report tell different stories.
This article explains what needs to be recorded, and which parts can be handed to an offshore bookkeeping team working in QuickBooks Online.
The four things to keep apart#
- Billed and unpaid: invoices sent to clients that are still open.
- Unbilled work in progress: work done, time logged, but no invoice yet.
- Retainers and advances: money received before the work is done.
- Reimbursable expenses: costs paid for a client that will be billed on.
Each one sits in a different place in the books. Mixing them makes the receivables aging unreliable.
Time-based billing#
If the firm bills by the hour or by milestone, the invoice is raised from time records kept outside QuickBooks Online or inside it. The bookkeeping job is to make sure the invoice list agrees to the time or milestone record, and that nothing logged is left unbilled without anyone knowing.
At month-end, the unbilled amount is listed by client. Whether it is also recorded in the books depends on the client's accounting basis and the preparer's instructions. A cash-basis business may only track it in a schedule. An accrual-basis business may record it as a receivable or contract asset. We apply whichever the accounting firm confirms.
Retainers#
A retainer paid in advance is not income on the day it arrives, in many cases. The terms of the engagement and the accounting basis decide this, so the treatment must be confirmed by the accounting firm or preparer.
Illustrative example#
All figures are illustrative round numbers.
A client pays a retainer of 3,000 in advance, covering three months of services at an even 1,000 a month.
| Month | Cash received | Held as client advance at month-end | Recognised for the month |
|---|---|---|---|
| Month 1 | 3,000 | 2,000 | 1,000 |
| Month 2 | 0 | 1,000 | 1,000 |
| Month 3 | 0 | 0 | 1,000 |
If the full 3,000 was booked as income in month 1, month 1 would look strong and months 2 and 3 would look weak. If the retainer is instead a deposit against future invoices, it is a liability or credit that is applied when the invoice is raised. Either way, the point is to decide the treatment once, write it down and apply it the same way each month.
Some retainers are held for the client and not earned until applied. These are different again and may have rules specific to the profession and jurisdiction. We flag them to the firm rather than decide.
Reimbursable expenses#
Expenses paid on behalf of a client should be coded so they can be found and billed on. We track them by client, check them against the month's invoices and list any that have not been billed. Whether they are billed at cost or with a mark-up is a commercial decision for the firm or owner.
Receivables aging#
The aging report is only useful if payments are applied to the right invoices. Common review checks are:
- Payments received but sitting in undeposited funds
- Credits and advances not applied to open invoices
- Old invoices that are unlikely to be paid and need a decision
- Invoices that do not agree to the engagement terms
Writing off a balance, or setting aside an allowance for one, is a judgement for the firm or owner. We prepare the list and the supporting detail.
Why this work is hard to staff#
The difficulty here is in the records themselves. Four balances (billed and unpaid, unbilled work in progress, retainers and advances, and reimbursable expenses) each sit in a different place in the books, and mixing them makes the receivables aging unreliable. Retainers add a further question, because some are held for the client and not earned until applied, and those may carry rules specific to the profession and jurisdiction.
A bookkeeper who has not worked with engagement-based billing can book a retainer as income on the day it arrives, or lose track of time logged but not invoiced. For a firm deciding whether to hand this work to an outside team, the question to ask is how each of the four balances is kept separate and how held funds are flagged rather than decided. How any professional or legal rule applies to a client stays with the firm or the client's preparer; the bookkeeping records the data they need.
What can be handed to an offshore team#
- Recording invoices, payments and deposits, and applying payments to invoices
- Clearing undeposited funds
- Tracking reimbursable expenses by client
- Preparing the unbilled work in progress schedule from the time or milestone records you send
- Retainer tracking by client
- Accounts payable and accounts receivable
- Bank and credit card reconciliations
- Monthly reports and a written summary of adjustments
What stays with the firm or owner#
- Pricing, rates and engagement terms
- Raising invoices where billing depends on professional judgement
- Collections conversations with clients
- Decisions to write off or reserve against balances
- Revenue recognition policy and tax return preparation
- Client communication and final review
Our work is reviewed by a Chartered Accountant before it is returned. The accounting firm's own review and sign-off still apply.
What to send#
- QuickBooks Online access limited to the client file
- Time records or milestone schedules, where billing depends on them
- Engagement letters or a summary of retainer terms
- Bank and card statements or feeds
- Receipts for reimbursable expenses
- Instructions on the accounting basis and the treatment of retainers
What comes back#
- Receivables aging
- Revenue by client or service line
- Monthly profit and loss
- Unbilled work in progress and reimbursable expense lists
- A written summary of every adjustment
Month-end review checks#
- Every invoice agrees to the time record or milestone schedule
- Unbilled work is listed by client and agreed to the schedule
- Retainer balances agree to the engagement terms
- Payments are applied to invoices and undeposited funds is clear
- Reimbursable expenses are coded to a client
- The aging report total agrees to the accounts receivable balance
- Older balances have been reviewed and any decisions noted
- Open items are listed for the firm or owner
Where to start#
Send one client file and we review it and send an estimate within 48 hours, with a capped number of hours. See our monthly bookkeeping and reconciliation service, the industries we work in and our page for accounting firms.
Frequently asked questions#
Do you decide how retainers are treated? No. The accounting firm or the client's preparer decides, because it depends on the terms and the accounting basis. We apply the agreed treatment consistently and flag cases that look different.
Can you track unbilled work if we keep time in another system? Yes. Send the time or milestone records and we reconcile the unbilled schedule to what has been invoiced.
Do you chase clients for payment? No. We prepare the aging report and the list of open items. Collections stay with the firm or owner.
Can reports be split by service line? Yes. Revenue can be reported by client or by service line, as long as the file is set up to capture it. We can help set that up in QuickBooks Online.
