A client wires a $10,000 deposit before a project starts, or pays a $5,000 monthly retainer for ongoing advisory work that has not been delivered yet. The cash lands in the bank account, and the natural instinct is to treat it as revenue for the month it arrived. That instinct is usually wrong, and the gap between cash received and revenue earned is exactly what a deferred revenue liability exists to track.
Cash Received Is Not the Same as Revenue Earned
A deposit, retainer, or advance payment represents an obligation the firm has not yet fulfilled. Until the work is delivered, that money belongs to the client in an accounting sense, even though it is sitting in the firm’s bank account. Recording it directly as revenue the moment it is received overstates the period’s income and hides the fact that the firm still owes the client either the work or the money back.
The correct treatment is to book the amount as a liability, generally called deferred revenue or unearned revenue, when it is received. As the related work is actually delivered, the corresponding portion moves from the deferred revenue liability into revenue. A $12,000 retainer covering three months of advisory work, for example, would generally move $4,000 into revenue each month as that month’s services are delivered, not all $12,000 in the month the retainer was paid.
This distinction shows up clearly on the balance sheet. A firm carrying a large deferred revenue balance has real cash on hand, but that cash is offset by an equally real obligation. Treating the deposit as available profit rather than as client money held against future delivery is a common way growing firms end up short when a project is cancelled and a refund is owed.
Deposits Versus Retainers Versus Progress Billings
These three are related but not identical, and mixing them up in the books creates confusion about what is actually owed.
A deposit is typically a one-time advance tied to a specific engagement or milestone, paid before work begins, and expected to be fully earned as that specific engagement is delivered.
A retainer is typically a recurring advance payment for ongoing work over a defined period, such as a monthly advisory retainer. It is earned incrementally as each period’s services are delivered, and unused retainer balances raise the refundability question addressed in the FAQ above.
A progress billing is different from both: it is an invoice for work already delivered against a milestone, not an advance for work not yet started. Progress billings on a percentage-of-completion fixed-fee project, discussed in fixed-fee versus time-and-materials contracts, are recognized as revenue when issued because they represent value already delivered, not cash held against future obligation.
A firm that labels all three the same way in its books, or records them all directly to a single revenue account regardless of type, loses the ability to tell how much of its cash position is actually earned versus how much is client money it still owes work for.
GST/HST Timing on Deposits
The GST/HST treatment turns on what the amount actually is, not on what it is called on the invoice. CRA draws a real distinction here, covered in GST/HST Memorandum 300-6, Time of Liability:
A true deposit is security against non-performance, refundable if the engagement does not proceed, and not yet consideration for a supply. CRA’s position, in GST/HST Memorandum 300-6-8, Deposits, is that no tax is payable on a true deposit until it is actually applied against a supply, either as full or partial payment or when it is forfeited.
A prepayment, retainer, or progress payment is different: it is consideration the client is paying in advance for a supply that will happen, not security against one that might not. GST/HST is generally payable on a prepayment or progress payment at the earlier of when the amount becomes due or when it is paid, which in practice means the period it is received, well before the related work is delivered.
Most of what consulting firms informally call a “deposit,” a retainer paid before advisory work starts, or an upfront payment on a project that is definitely proceeding, functions as a prepayment for GST/HST purposes, not a true refundable deposit, even if the invoice uses the word “deposit.” The label on the invoice does not control the tax treatment; the actual terms do. This is worth confirming against the specific engagement letter rather than assuming based on terminology, since a genuinely refundable, contingent deposit is taxed differently than a nonrefundable retainer applied to guaranteed future work.
For the typical case, a nonrefundable retainer or project deposit that is definitely being applied to future billing, GST/HST is due in the period the amount is received, even though the underlying revenue for accounting purposes is not recognized until later as the deferred revenue liability is worked down. Getting this backwards, not charging GST/HST on a prepayment that should have been taxed at receipt, creates a filing gap that shows up as a mismatch between GST/HST collected and revenue reported when a return is reviewed.
Booking It in QuickBooks Online
A workable structure for a growing consulting firm:
- A liability account, separate from operating liabilities, labeled deferred revenue or unearned revenue.
- Deposits and retainers received are recorded as a credit to this liability account (net of GST/HST, which hits the GST/HST payable account per the usual clearing structure), not directly to a revenue account.
- As work is delivered against the deposit or retainer, a journal entry or invoice moves the earned portion from the liability account into the appropriate revenue account.
- The deferred revenue balance is reviewed at each month-end close as part of the process covered in what a monthly close looks like from your side, so the liability stays current rather than accumulating stale, unreconciled balances.
For a firm running multiple retainer clients, tracking each client’s deferred revenue balance separately, rather than one pooled liability account, makes it possible to see at a glance which clients have unused retainer hours outstanding and which are fully earned through the current period.
Related Guides
- Fixed-fee vs time-and-materials contracts for IT consultants covers how progress billings and revenue recognition work on the delivery side once a deposit or retainer has funded the start of an engagement.
- What a monthly close looks like from your side covers where a deferred revenue review fits into the broader monthly close process.
- GST/HST and QST ITC/ITR documentation for IT contractors covers the broader documentation standard that deposit-related GST/HST filing should meet.
Scope of This Guide
This guide covers the accounting treatment and GST/HST timing for deposits, retainers, and other advance client payments received by IT consulting firms. It does not cover:
- Refund terms or engagement contract drafting, which should be reviewed with a lawyer
- Trust accounting requirements that may apply to specific regulated professions
- QST timing for Quebec-based engagements, which generally follows the same advance-payment logic but should be confirmed separately
This is general information, not advice for a specific engagement. A CPA reviewing your firm’s actual retainer and deposit structure can confirm the correct booking and GST/HST timing for your specific client agreements.