Agencies sell time and ideas, which makes their books look simple: money in, payroll out. In practice most agency owners cannot say which clients make money, and their revenue line is inflated by ad spend that was never theirs. This guide covers the bookkeeping that fixes both, with worked examples.
How should an agency record retainers?
A retainer billed at the start of the month for work done during the month is straightforward: it is earned by month end. A retainer paid in advance for several months, or a project deposit, is not revenue yet. It sits on the balance sheet as deferred revenue, a liability, and moves to income as the work is delivered. Booking a three-month prepayment as one month’s revenue makes that month look brilliant and the next two look like a crisis.
| Line | January | February | March |
|---|---|---|---|
| Cash received | $18,000 | $0 | $0 |
| Revenue earned | $6,000 | $6,000 | $6,000 |
| Deferred revenue at month end | $12,000 | $6,000 | $0 |
Example only: a made-up business. The figures add up but belong to no real client.
Each month one entry moves $6,000 from deferred revenue to income. If the work is front-loaded, a launch in month one for instance, release the revenue in line with the work instead, but write down the basis and use it every month.
How do you track profitability by client?
You need two things: revenue tagged by client, and the cost of delivering it. In QuickBooks Online or Xero that means every invoice, contractor bill and direct expense carries the client or project. The missing piece is usually staff time. If your team tracks hours by client, multiply by a loaded cost rate, salary plus payroll taxes and benefits divided by working hours, and you can see the true margin on each account. Most agencies find one or two large clients that are quietly unprofitable.
Freelancers are easier: their bills already carry a client. Code each one to the client it serves, and contractor cost lands in the right place without any time tracking.
What is pass-through spend, and is ad spend gross or net revenue?
When you buy media, print or software on a client’s behalf and bill it back, that money is not really your revenue. If you book $50,000 of client ad spend as income and $50,000 as expense, your revenue is overstated and every margin percentage is wrong. The cleaner treatment for true pass-throughs, where you act as the client’s agent, is to run them through a reimbursable or clearing account so only your fee or markup reaches the income statement. Whatever you choose, keep pass-through costs on their own lines so you can always see revenue net of them, often called agency gross income.
Whether a cost is gross or net revenue under US accounting standards turns on one question: are you the principal or the agent? If you control the media or service before it reaches the client (you are primarily responsible to the client for delivering it, you carry the risk if it goes unused, you set the price), it is usually gross. If you arrange it for the client, who owns the ad account and approves the budget, you are usually an agent, and only your fee is revenue. The contract decides, so read it with your accountant and apply the answer the same way every month.
| Line | Booked gross | Booked net |
|---|---|---|
| Revenue | $60,000 | $15,000 |
| Pass-through ad spend | ($45,000) | $0 |
| Agency gross income | $15,000 | $15,000 |
| Delivery labor | ($6,000) | ($6,000) |
| Delivery margin | $9,000 | $9,000 |
| Margin as a share of revenue | 15% | 60% |
The dollars are identical. Only the percentage changes, and the gross version makes a healthy client look like a weak one.
Example only: a made-up business. The figures add up but belong to no real client.
How to record client reimbursed expenses
Smaller rebills, such as stock images, travel, printing or a software seat bought for one client, follow the same logic. Both QuickBooks Online and Xero let you mark an expense as billable and attach it to a customer when you enter it, so it waits to be added to that client’s next invoice instead of being forgotten. Billable expenses are not in every plan, so check yours.
- Mark the expense billable and pick the client when you enter the bill or card charge, not at invoice time.
- Decide once whether rebills sit in a reimbursable expense account that the invoice clears, or in income with an offsetting cost, and use the same treatment every month.
- If you add a markup, let it post to its own income line, so the rebill nets to zero and only the markup shows as revenue.
- At month end, review billable expenses that are still waiting. Anything older than a month is usually money you meant to recover and did not.
What numbers should an agency owner watch?
- Agency gross income: revenue after pass-through costs. This is the real top line.
- Delivery margin: gross income less the cost of the people doing client work. Healthy agencies run 50% or better.
- Utilization: billable hours as a share of available hours.
- Revenue per full-time employee.
- Client concentration: any client over 20% to 25% of income is a risk.
- Net profit: 15% to 20% of gross income is a common target.
These only mean something when retainers, pass-throughs and time are booked the way this guide describes. If you would rather receive them than build them, profit-by-client reporting can be part of your monthly reports, delivered by the 5th.
How are freelancers and contractors handled?
Collect a W-9 before the first payment and code every contractor bill to the client it relates to. Any unincorporated US contractor paid $2,000 or more for work in 2026 gets a 1099-NEC (the threshold was $600 through 2025 and is adjusted for inflation from 2027). The usual deadline is January 31; for 2026 payments it is February 1, 2027, because January 31 falls on a Sunday. Our guide to 1099s for freelancers and other contractors covers the rest.
Cash or accrual accounting for an agency?
Many small agencies file tax on the cash basis, which is allowed and often advantageous. For running the business, accrual is better: it matches each month’s income with the cost of earning it and shows receivables and unbilled work. Good bookkeeping can give you accrual management reports and a cash-basis figure for the tax return from the same file.
What does a clean monthly close look like for an agency?
- All bank, card and payment processor accounts reconciled
- Retainers and deposits reviewed and deferred revenue adjusted
- Pass-through costs matched to the client invoices that recover them
- Unbilled time and expenses reviewed
- Profit and loss by client, plus receivables aging
Frequently asked questions
How do you account for a retainer?
A retainer paid in advance is deferred revenue, a liability, until you do the work. Each month, move the share you earned from deferred revenue to income, as in the three-month Example above. A retainer billed and worked in the same month is simply that month’s revenue.
What is agency gross income?
Revenue after pass-through costs such as client media, printing and software you rebill. It is the money the agency earned for its own work, so it is the figure to measure margins and growth against.
Is a markup on pass-through costs revenue?
Yes. If you rebill $10,000 of media at $11,000, the $1,000 markup is agency revenue even when the $10,000 runs through a pass-through account. Give markups their own income line so you can see what they earn.
What happens to deferred revenue if a client cancels a retainer?
Whatever you refund comes off deferred revenue with the refund. Whatever the contract lets you keep becomes revenue when the contract ends. Because the prepayment was never booked as income, a cancellation does not knock a hole in an old month’s profit.
Do we need time tracking to see profit by client?
For a true margin, yes, at least for the people who do client work. Without hours you can still see revenue and freelancer costs by client, but salaries get spread by guesswork, and the clients that quietly use the most time stay hidden.
Remote Bookkeepers keeps the books for agencies and professional services firms across the US: retainers, project profitability and clean monthly reporting by the 5th. Want to know whether your client margins are real? Add us as your accountant for a free books review, and you get a written list of what we find in about 48 hours.