Retainage, usually 5 to 10 percent of each progress payment, gets held back by the owner or general contractor until the project reaches substantial completion or another contract milestone. Most contractors either ignore it on their books or lump it in with regular accounts receivable. Both approaches create problems.

The right approach is to track retainage in its own balance sheet account. Set up an asset account called Retention Receivable (or Retainage Receivable) that sits next to your regular AR on the balance sheet. When you generate a progress invoice, split the entry so the retained portion goes to this account instead of AR.

Say you bill $50,000 for the month’s work with 10 percent retention held. The entry debits AR for $45,000, debits Retention Receivable for $5,000, and credits Construction Revenue for $50,000. You still recognize the full revenue earned, but the receivable splits between what’s collectible in the normal 30 to 60 day payment cycle and what’s held until project closeout.

When the retention is released, the entry moves the balance back into AR (or straight to cash if paid immediately). Debit AR for $5,000 and credit Retention Receivable for $5,000. When payment arrives, it clears AR like any other invoice.

If you’re the GC withholding retention from your subcontractors, mirror the process on the payables side. Create a Retention Payable liability account. When a sub submits a $20,000 invoice with 10 percent retained, debit Subcontractor Costs for $20,000, credit AP for $18,000, and credit Retention Payable for $2,000. When you release their retention at project closeout, move $2,000 from Retention Payable back to AP or cash.

This separation matters for a few reasons. Your AR aging report actually reflects what you can expect to collect in the normal cycle instead of showing massive balances that are 120+ days old because they’re retention. Cash flow forecasting gets more accurate because you can see what’s actually due soon versus what’s tied up until closeout. You also get a clean view of your total retention exposure across all active jobs, which is real money sitting on the sidelines.

The closeout process also gets cleaner. At the end of a project, your Retention Receivable balance for that job tells you exactly what’s still owed. Same for retention payable when you’re closing out subs. No hunting through aged invoices trying to figure out what’s retention and what’s a collection problem. Our construction and contractor clients often find that fixing retainage tracking alone cleans up months of confusion about which jobs are actually profitable and which are still waiting on money.

Contractors also tend to forget about retention when a project wraps. The GC quietly stops owing it because nobody invoiced for release. Tracking it in a dedicated account means you have a standing list of balances that need to be collected, and you can chase them proactively instead of discovering a year later that $30,000 was never released. If your books currently treat retention as regular AR or ignore it entirely, the Pasadena bookkeepers at A Squared can restructure your chart of accounts and back-correct the entries so your financials reflect what’s actually happening on your projects.