When a client pays a retainer, it’s tempting to record it as income right away. The cash is in your account, after all. But that’s not how retainer accounting works.

A retainer is a prepayment for future work. Until you perform that work, you haven’t earned the money. In accounting terms, it’s a liability called deferred revenue or unearned revenue. You owe the client either the services they paid for or a refund if the work never happens.

To handle this correctly, create a liability account in your chart of accounts called something like Retainer Deposits or Client Prepayments. This sits under current liabilities on your balance sheet.

When the client pays the retainer, record it by increasing your bank account and increasing the liability. A $5,000 retainer means $5,000 more cash and $5,000 you owe in services. No revenue appears yet because you haven’t earned anything.

As you perform work against the retainer, move money from the liability to revenue. Complete $1,500 worth of work in January? Decrease the liability by $1,500 and record $1,500 in revenue. The liability shrinks because you owe less, and income increases because you’ve earned it. Keep doing this until the retainer is used up or the engagement ends.

This approach matters for accurate financial statements. Your income only reflects revenue actually earned, giving you a real picture of monthly performance. Your balance sheet shows what you still owe clients. For tax purposes, you generally pay taxes when revenue is earned, not when cash is received.

The common mistake is treating retainers as revenue the moment they land in your bank account. Professional services businesses like law firms, consultants, architects, and marketing agencies deal with retainers constantly. If you record a $20,000 retainer as income in March, your books look fantastic that month and then terrible in April and May when you’re doing the work but no new deposits are arriving. That distorted view hides whether the business is actually profitable.

Tracking retainer balances also keeps client relationships clear. You know exactly how much credit each client has remaining, when to request a replenishment, and whether a project is running over the original scope. Some businesses send monthly statements showing retainer usage so clients see where their money went.

A San Diego bookkeeper can help you set up the right accounts in QuickBooks and make sure revenue recognition happens accurately each month. Once the structure is in place, the ongoing process is straightforward. You just need to consistently match revenue to the work performed rather than the cash received.