Journal Entry for Holdback Receivable

Holdback receivable is the amount of cash that buyer paid but it is held by the third party, it is not yet released to the seller.

Purchase is the exchange between goods or services and payment between seller and buyer. The seller agrees to deliver goods or services to the customer. In exchange, they expect to receive the payment in return. The buyer has the obligation to make payment after receiving goods or services.

It sounds very simple, the seller provides the products and the buyer makes payment. However, it will be complicated when the supplier requires to complete the service over a period of time. The nature of service requires the supplier to perform over a long time. The customer must make payments to suppliers so they can start a service. But they must take a risk if the supplier receives payment but does not perform service. On the supplier side, they require the customer to make a payment before completing the service. They are concerned about the uncollectible payment after providing service.

To solve this problem, the holdback receivable is used. The customers are required to make full payment before receiving service. However, the cash will not transfer to the supplier yet, it holds in the third-party account. It will be transferred to the supplier only after the service is completed.

Most of the holdback receivable will be held by the bank or escrow which acts as the middleman. The bank will ensure that cash was received from the customer and it will be transferred to the supplier only after the confirmation of service is complete. It will be based on the term and conditions of both parties that are predefined.

The amount of holdback receivable depends on the agreement between the two parties. It equals a certain percentage of the total sale amount.

Journal Entry for Holdback Receivable

The holdback receivable will impact the financial statement of supplier, it must record in a separate account from normal accounts receivable. The supplier has to record it as the current asset on balance sheet. The journal entry is debiting cash, holdback receivable, and revenue.

Account	Debit	Credit
Cash	$$$
Holdback Receivable	$$$
Sales Revenue		$$$

The transaction will record the cash received from the sale of the service. The holdback receivable will be classified under accounts receivable on the balance sheet. Both cash and holdback receivable will depend on the agreed term.

After the supplier completes the service for customer, the third party will release the fund. It must confirm by the customer as the services are completed. The supplier needs to reverse the holdback receivable.

Account	Debit	Credit
Cash	$$$
Holdback receivable		$$$

Example

ABC is a construction company. One customer hires the company to construct a home which will take around 3 months to complete. The cost of construction is $ 100,000. The customer agrees to pay 90% to the bank and it will release to ABC after construction completion. The remaining 10% will be held for 2 months to ensure the construction quality. Please prepare journal entry for holdback receivable.

When ABC complete the construction, they have to record revenue and cash received from bank. The remaining will record as a holdback until the customer agrees to release the payment from bank.

The journal entry is debiting cash $ 90,000, holdback receivable $ 10,000 and revenue $ 100,000.

Account	Debit	Credit
Cash	90,000
Holdback Receivable	10,000
Sales Revenue		100,000