Invoicing and documents
Retainer invoice
A retainer invoice is a bill sent to a client to collect an upfront deposit before work begins, securing your services and providing working capital for the upcoming project.
What is Retainer invoice?
When you agree to take on a large project or provide ongoing services, you often need a commitment from the client before committing your time and resources. You achieve this by issuing a retainer invoice. This document requests a fixed advance payment. Once paid, the funds sit in your bank account, but in accounting terms, you have not earned them yet. Under accrual accounting rules, an unearned retainer is a liability, not revenue, until the work is actually done. You owe the client either the promised services or a refund. As you complete milestones or log billable hours, you issue standard invoices that draw down from this initial deposit, moving the money from a liability account to recognised revenue on your profit and loss statement.
How Retainer invoice works
The process begins when you and your client sign an agreement detailing the scope of work and the required upfront deposit. You then generate and send the retainer invoice for this initial amount. When the client pays, you record the cash receipt and credit a liability account, often called unearned revenue or client deposits. You do not record this as sales revenue. As you perform the agreed work, you generate regular invoices detailing the services provided. Instead of asking the client for more money, you apply the retainer balance to these new invoices. This action reduces the client deposit liability and increases your actual sales revenue. If the retainer is fully depleted before the project ends, the client pays the remaining balance out of pocket.
- Agree on the project scope and the required upfront deposit amount.
- Issue a retainer invoice to collect the advance payment from your client.
- Record the received payment as a liability rather than immediate sales revenue.
- Perform the work and generate standard invoices for the completed services.
- Deduct the billed amounts from the retainer liability to recognise actual revenue.
Worked example
Apex Consulting agrees to a project for a total fee of $10,000. They require a 40 percent upfront deposit. Apex issues a retainer invoice for $4,000. The client pays, and Apex records a $4,000 liability. In the first month, Apex completes work worth $3,000. They issue a standard invoice for $3,000 and apply $3,000 from the retainer to pay it. The liability drops to $1,000, and Apex recognises $3,000 in revenue. In the second month, Apex bills the final $7,000. They apply the remaining $1,000 retainer balance. The client now owes the outstanding $6,000, which they pay in cash.
Why it matters for your business
Requesting a retainer protects your business from cash flow shortages and unpaid bills. By securing funds upfront, you ensure you can cover early project expenses, such as software subscriptions or subcontractor fees, without dipping into your own working capital. It also tests the client's commitment, filtering out those who might default on payment later. From a compliance perspective, correctly tracking these deposits as liabilities keeps your financial statements accurate and prevents you from paying taxes on unearned income too early. If you need a simple way to manage this, Paper & Pen creates invoices, quotations and receipts, and Sales and Invoicing is free forever.
Questions
Common questions
Do I charge value-added tax on a retainer invoice?
What happens if the project is cancelled before the retainer is used?
How is a retainer invoice different from a proforma invoice?
Related terms
- Proforma invoice A proforma invoice is a preliminary bill sent to buyers in advance of a shipment or service, detailing the estimated costs without creating a legal demand for payment or an accounting receivable.
- Recurring invoice A recurring invoice is a billing document sent automatically to a customer at regular intervals for ongoing services, subscriptions, or repeated product deliveries of the same value.
- Accrual accounting Accrual accounting is a financial method where you record revenue when a sale occurs and expenses when you receive goods or services, regardless of when the actual cash changes hands.
- Accounts receivable Accounts receivable represents the total amount of money owed to a business by its customers for goods or services that have been delivered but not yet paid for.
- Credit note A credit note is a commercial document issued by a seller to a buyer, reducing or cancelling the amount owed on a previously issued invoice due to errors, returns, or damages.
- Debit note A debit note is a commercial document issued by a buyer to request a credit, or by a seller to increase the amount owed on an existing invoice.