How do I account for a retainer / prepaid services with Ruddr and Xero?

There are times when a customer may pay your company in advance for services that you will render at a later point in time. This is sometimes referred to as a retainer because the amount paid will “retain” your services and ensure that those services are rendered within an acceptable timeframe. A common question we get is how those types of arrangements should be handled in Ruddr and Xero (for customers that leverage Xero for accounting). In order to receive retainer payments, you first need to do some basic setup in Xero and Ruddr. Then, for each retainer you have just a few steps to do, as further outlined below. Step 1: Create an Unearned Revenue account in Xero Within Xero, click on the Accounting main menu option and then select the Chart of accounts secondary menu option. Click the Add Account button to bring up the Add New Account window. From here, set the Account Type to “Current Liability” and type in a General Ledger code per your existing standard. For the Name, type in “Unearned Revenue” and optionally provide a description of this new account as shown below (Figure 1). Click the Save button.

Figure 1 - Add an Unearned Revenue Account in Xero

With this step complete, we now have a liability account called “Unearned Revenue” that will show the total client prepaid amounts on the company’s Balance Sheet. Step 2: Create a Product Service Item called “Retainer” Within Xero, click on the Business menu option and then select the Product and services secondary menu option. Click the New item button to bring up the New Item window. On this window, type in the Code per your standard and then type in “Retainer” for the name. Only check the Sell checkbox, leaving the other two checkboxes unchecked. For the Sales account dropdown, select the liability account that you created in Step 1 above (Figure 2) and click the Save button.

Figure 2 - Retainer Item Using the Unearned Revenue Sales Account

Step 3: Record the Receipt of Money from a Client Within Xero, click the Accounting main menu option and then the Bank accounts secondary menu option. Then click the Manage Account dropdown for the bank account that will hold the funds and select the Receive Money menu option (Figure 3).

Figure 3 - Receive Money Option in the Manage Account Menu

In the Received as dropdown, select “Prepayment”. Then key in the customer name in the From textbox. Once you start typing the customer name, Xero will provide you with a list of matching customers and you can select the appropriate one. Type in a description of the funds being received, an amount (in the Unit Price column), and select the Unearned Revenue account that you created in Step 1 above. Click Save to record the prepayment (Figure 4). At this point, you should see the prepaid amount on the company Balance Sheet in the Unearned Revenue liability account.

Figure 4 - Record a Prepayment to Unearned Revenue

Step 4: Add a “Retainer” Invoice Item in Ruddr Within Ruddr, go to the Custom Data area within Workspace Settings. Select the Invoice Items custom data option and then click the + Add Invoice Item button at the bottom of the list. Add an invoice item named “Retainer” and set its type to Income (Figure 5).

Step 5: Update the Xero Integration in Ruddr to Map the new Retainer Invoice Item Within the Integrations area of Ruddr, click on the Settings of the Xero integration. Then click the pencil icon on the Invoice Items row to edit the invoice item mappings. The new Retainer invoice item should be mapped to the Xero Product/Service item called Retainer that you created in Step 2 above (Figure 6).

Figure 6 - Map the Retainer Invoice Item to the Xero Retainer Item

Step 6: Create your Invoice in Ruddr and Publish it to Xero Once you have a Ruddr project set up with the appropriate billing type, you are ready to create an invoice in Ruddr and publish that invoice to Xero. We won’t cover invoice creation in this article but you can see a separate help article on that topic. When your invoice is created, you need to add an ad-hoc line to the bottom of the invoice that uses the Retainer invoice item and offsets the entire amount of the invoice (assuming that you want to pay for the entire invoice from the retainer). This will result in a zero dollar invoice as shown below (Figure 7). Just click on the Publish button to push this invoice to Xero.

Figure 7 - Invoice Offset by a Retainer Line

Step 7: Review the Income Statement and Balance Sheet in Xero Now that the invoice is created, you can verify that the services fees show as revenue on the Income Statement in Xero. Also, you can verify that the Unearned Revenue liability account on the Balance Sheet has been reduced by services fees.