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Retention is a specific percentage of the amount certified, deducted from the contractor by the contractee. The reason for the deduction is to ensure that the contractor will properly complete the work as per contract.
Retention Receivable: The amount deducted by the contractee from the contractor is a current asset for the contractor and a current liability for the contractee. I will explain how it is a current asset for the contractor. I will take an example. Mr. Anwar is a contractor and he submitted interim payment certificate for releasing the amount of work completed. The amount of work certified is 10000, the contractee retains 5% (500) of the work certified as per contract and releases the remaining amount (9500). The retention rate is mentioned in every contract. Actually, the retention amount is earned by Anwar but not received just like account receivable. The accounting entry in the books of the contractor (Anwar) will be.
Bank DR 9500
Retention Receivable DR 500
Construction Revenue 10000
