Contract Assets and Contract Liabilities Part II

So, how do you determine if conditional retainage is included (presented) in contract assets or contract liabilities? (If you have questions on what conditional retainage is, please check out the first lesson.)

One thing to keep in mind when we talk about conditional retainage is that we're talking about presentation. Conditional retainage is an asset, there's no doubt about that. However, we need to determine if it is presented under contract assets or presented under contract liabilities (netted against contract liabilities).

Let's assume, to keep this as simple as possible, underbillings (contract asset) and overbillings (contract liabilities) are the only other variables.

On a contract by contract (or job by job) basis:

If a contract (or job) has an underbilling (contract asset) with conditional retainage, the conditional retainage is presented under contract assets. The idea is that an asset (underbilling) plus another asset (retainage-conditional) is an asset. (Job#1 in the example below)

If a contract (or job) has an overbilling (contract liability) with conditional retainage, it gets a little complicated:

If you net the overbilling (liability) with the retainage receivable-conditional (asset) and you still get a liability, the entire retainage amount is presented under contract liabilities. It offsets the liability. (Job#2 in the example below)

If you net the overbilling (liability) with the retainage receivable-conditional (asset) and you get an asset, you offset the overbilling to zero, and the remaining retainage amount is presented under contract assets. (Job#3 in the example below)

Example:

Most companies record retainage receivable to one account (both unconditional and conditional) so you would need to record the following reclassifying journal entry to separate out conditional retainage from unconditional retainage using information from the example above.

Thanks!

Ara

Disclaimer:

The content provided on this website is for educational purposes only. While every effort has been made to ensure the accuracy of the information, the lessons, materials, and resources related to construction accounting are not intended to replace professional advice. I recommend that you consult with a certified accountant or other industry expert before making any financial decisions or implementing accounting practices in your business.

The website owner does not accept any liability for any errors or omissions in the content, nor for any financial loss or damage resulting from the use or misuse of the information provided.

By using this website, you agree to take full responsibility for your actions based on the information provided.