In the accounts receivable process, retainage is a portion of the final payment of a contract for a product or service. This payment is withheld until the project is complete per the terms of the contract. The payment is withheld by the client or owner of the contract.
Accounts receivable retainage funds are generally placed in a trust account until payment is released upon completion of the contract terms. This can include ensuring that all parts of the project are functioning in a satisfactory manner. There also cannot be any liens, including mechanic's liens, that are currently active. There are two options for reporting retainage: cash basis and accrual basis.