Payables processing - Withholding and retention scenarios

Learning Outcomes

After studying this article, you will be able to explain the concepts of payables withholdings and retention in supplier payments. You will know how and why withholdings and retentions arise, how to account for them in the general ledger, and how they affect financial statements. You will become familiar with key terms and typical exam scenarios concerning withholding and retention in payables processing.

ACCA Maintaining Financial Records (FA2) Syllabus

For ACCA Maintaining Financial Records (FA2), you are required to understand the processing of payables where part of the amount due to a supplier may be withheld or retained for a period. Focus your revision on the following areas:

• The accounting treatment of trade payables
• Recording supplier invoices with withholdings and retentions
• The impact of retentions on supplier balances
• Double-entry for withheld amounts on supplier payments
• The correct presentation of liabilities in the statement of financial position
• Recognition and reversal of retentions or withholdings when released or paid

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. When a business agrees to pay a supplier 90% of an invoice now and withhold 10% as a retention, which entry is made for the withheld amount?
2. How is a withheld retention shown in the statement of financial position as at the year end?
3. True or false? Retentions reduce expenses in the statement of profit or loss at the time they are withheld.
4. What happens when a previously withheld retention is finally paid to the supplier?

Introduction

Some purchases and supplier payments involve not settling the full amount of an invoice immediately. Instead, a business may hold back (withhold) or retain part of the amount due—commonly called a “retention” or “withholding.” This is frequent in industries such as construction, where payments are staged to ensure supplier performance or allow for dispute resolution.

Accounting for withholdings and retentions ensures that liabilities and expenses are faithfully represented. You need to know how to record such transactions, how they affect the payables ledger and supplier balances, and how to reflect retentions in financial statements. The ACCA FA2 exam often tests your ability to process these situations with correct double-entry bookkeeping.

Key Term: retention
The portion of a supplier invoice that is withheld by the customer and paid at a later date, often after satisfactory completion of work or expiration of a guarantee period.

Key Term: withholding
An amount deducted from payment to a supplier, not paid until certain conditions are met, such as contract completion or issue resolution.

Payables Processing: Withholding and Retention Explained

Most supplier invoices are settled in full, but sometimes a business withholds or retains a portion of the amount. This means part of the liability remains unpaid until a future event, such as project completion or end of a warranty period.

These practices serve as financial security. If defects arise or obligations are unmet, the withheld sum can offset costs or penalties. Only when the conditions are fulfilled is the retention paid to the supplier.

Withholdings and Retentions in Supplier Transactions

Retentions are most common in sectors like construction or engineering contracts, but they can appear in any situation where goods or services must be checked or guaranteed.

For accounting, the key principles are:

• The full invoice value is entered as a payable when received.
• Payments made are allocated to part of the invoice (e.g., 90%), with the remaining amount shown as a retention or withholding.
• The unpaid (retained) amount remains a liability to the supplier.
• When the retention is paid, the liability is cleared.

Key Term: payables balance
The outstanding amount owed to a supplier, including any retentions or withholdings not yet paid.

Accounting Entries for Retentions and Withholdings

The correct application of double-entry ensures that financial records reflect the true supplier liability and show outstanding retentions.

1. On receipt of the supplier invoice:

   • Debit the relevant expense or asset account (e.g., Purchases, Plant and Equipment)
   • Credit Payables with the full invoice amount

2. On part-payment with a withholding/retention:

   • Debit Payables with the amount paid (e.g., 90%)
   • Credit Cash at bank with amount paid

   The remaining balance (10%) remains as a liability in Payables.

3. When retention is released (and paid at a later date):

   • Debit Payables (release balance for payment)
   • Credit Cash at bank

The retention is not written off or removed until it is actually paid.

Worked Example 1.1

A business receives a supplier invoice for $10,000. The agreement is to pay 90% now and retain 10% ($1,000) for six months, pending satisfactory completion of work.

Question: Show the double-entry bookkeeping at each stage: (a) when the invoice is received, (b) on immediate payment of 90%, and (c) when the retained amount is paid.

Answer:

• (a) Invoice received:
  • Debit Purchases $10,000
  • Credit Payables $10,000
• (b) Payment of 90%:
  • Debit Payables $9,000
  • Credit Cash at bank $9,000
• (c) Payment of retention at a later date:
  • Debit Payables $1,000
  • Credit Cash at bank $1,000

Exam Warning

Accounting for retentions does not reduce expenses or assets at the time of withholding. Only the liability (Payables) reflects the unpaid, retained amount. Errors include incorrectly removing the expense or not recording the full liability for amounts withheld.

Reporting Retentions in Financial Statements

At the end of the accounting period, the remaining withheld/retained amounts are shown in the statement of financial position as part of trade payables.

• All outstanding retentions are part of current liabilities unless due over 12 months, in which case classify as non-current liabilities.

There is no immediate impact on the statement of profit or loss, since the expense was recorded in full on invoice receipt.

Worked Example 1.2

A supplier invoice for $25,000 is received and the business pays $20,000 immediately, withholding $5,000 as retention for one year. At year end, the $5,000 is still unpaid.

Question: How is this retention presented in the financial statements?

Answer:

• Trade payables in the statement of financial position will include the $5,000 retention as part of total supplier liabilities.
• The $25,000 expense (e.g. Purchases, Asset) appears in the statement of profit or loss for the period of purchase.
• There is no separate disclosure of retention unless it is significant; it may be shown as a line item or in the notes if material.

When Retentions Are Paid

When the retention period ends or obligations are met, the business pays the retained amount. The payment is recorded as normal:

• Debit Payables (to clear liability)
• Credit Cash at bank

There is no new expense at this stage, as the cost was recorded previously.

Revision Tip

Always check if any supplier balances include retentions, so you do not understate trade payables at the reporting date.

Summary

Withholdings and retentions in payables involve holding back part of a supplier payment until certain conditions are met. The full invoice is recorded as a liability on receipt, with only part paid immediately. The retained portion remains in payables and is settled when requirements are fulfilled. Accurate bookkeeping and correct liability presentation ensure that financial statements show a true and fair view of outstanding obligations.

Key Point Checklist

This article has covered the following key knowledge points:

• The meaning and purpose of withholdings and retentions in supplier payments
• How to record invoices, partial payments, and retentions in double-entry bookkeeping
• The impact of retentions on the payables balance and the statement of financial position
• Recognition and payment of retentions without affecting expense accounts again
• Required disclosure and classification of retentions in financial statements

Key Terms and Concepts

• retention
• withholding
• payables balance