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A common practice in the building and construction industry is to withhold amounts from payment until a job is satisfactorily completed. This is referred to as retentions. This support note explains one way to handle these type of transactions in your software if you are the contractor from whom the payments are being withheld. If your circumstances are different you may want to check with your accounting advisor.

See Withholding payments from contractors for information about retentions from the perspective of the person who is withholding the payments.

Note that the tax/GST codes shown in this support note are examples only. You should check with your accounting advisor or the ATO/IRD for the applicable tax/GST codes to use for your circumstances.


MK Constructions have made an agreement with Joy Smith and it has been arranged that Joy Smith will withhold twenty thousand dollars of the total invoice until the building contract is completed, so she can ensure that all work is completed to her satisfaction. Therefore she will only be invoiced during the contract for the amount minus the retainer. The invoice for the remaining retainer amount will be invoiced at a later stage.

1. Create an asset account for Retentions Held
  1. Go to the Accounts command centre and click Account List.
  2. Click the Assets tab.
  3. Click New and create an asset account with the following details.
2. Create a liability account for Liability for Defects
  2. Click the Liabilities tab.
  3. Click New.
  4. Create a liability account as per the example below to represent the liability for defects account.

You might want to set up several liability accounts if you want to separate out and report on the different type of liabilities that relate to New Homes, Extensions, or Commercial type properties, etc.

3. Create an invoice when there's a retention
  1. Go to the Sales command centre and click Enter Sales.
  2. In the Sales window, create an invoice splitting the contract details as follows:
    1. the amount of the retainer due is allocated to the Liability for Defects account and N-T assigned as the tax/GST code.
    2. The next line also relates to the retainer but is allocated to the Retentions Held account and is entered as a minus amount and N-T assigned as the tax/GST code.

      By creating the invoice this way you will not be including the retainer as part of the receivables report as it is not yet due. Once this is recorded it has the following impact:
    • your receivables report will only display the amount of the invoice not including the retainer.
    • your Balance Sheet will display the retainer amount in both the Retentions held and Liability for defects account.
4. Invoice for the retention and receive payment

When the contract has been finalised and the warranty period has expired you are in a position to raise an invoice for the value of the retainer. At this stage you will also need to assign the applicable tax/GST code.

In this example, you will need to create an invoice for the value of the retainer as follows:

Once the transaction is recorded the relevant income, GST and trade debtors is updated accordingly.

When the payment is received enter the Receive Payment to close the invoice.

5. Record a journal entry to clear the Retention Held and Liability for Defects accounts

Until the retainer amount is invoiced it is held temporarily in an Asset Account and Liability accounts which now needs to be cleared out.

A journal entry to the applicable accounts will clear this out.

  2. An example of what to enter is displayed below:
    • A debit amount to the value of the retainer is assigned to the relevant Retaining Liabilities account.
    • A credit amount to the value of the retainer is allocated to the relevant Retainer Held asset account.
  3. Click Record

Want to learn more?

There's plenty of business experts on our community forum who know a lot more about retention payments than we do.

Julie Carter, one of our top forum contributors, has a wealth of experience in this area. Check out her great article on Retention money and how it works.