Service-based company: How to categorize vendor costs

If you sell services, you have no COGS (Cost of Goods Sold), since you are not selling goods.  QB has had that hard-coded for over 30 years and cannot believe it has still never been updated. What you do have is COS (Cost of Sales) which includes the cost incurred directly for what you sell. No such thing as COS = Cost of Services that I am aware of at least not as a line on financial stmts. So you will have to pretend that COGS is COS in order to compute gross profit or gross margin. 

Expenses below gross profit to get to Net profit are those costs incurred even when you have zero customers such as office rent, utilities, phones, computers, internet service, etc.

In the chart of accounts, you can create a COGS type account and name it Cost of Sales

doing so will place it on P&L with the default COGS account, reporting gross profit correctly

Good for people to know.   In my case, for all my clients in my GovCon industry, there must be a very clear distinction  between direct and indirect cost, that each of the accounts numbers and names must titled accordingly to classify properly, so having a summary account for COGS/COS does not make much difference except to produce a subtotal for gross profit/margin calculation.  

Understand I could create a COS summary account, but no way to get rid of the COGS line at all? There are so many things I would have to change/delete from QB to make it work for me or clients. So I am finally trading in my old QBO for the same system that almost all of my clients use which meets our requirements for project cost accounting and indirect cost rates and allocations. 

QB desktop is much more functional than QBO will ever hope to be.  But it still takes some effort to set it up for government cost accounting, there are books on it.

You have to support the clients, change software

I agree QB Desktop is definitely better for me and clients than QBO but still a far cry from best bet. After doing this work for 35+ years and for almost 100 clients in the last decade, I already know QB costs alot more time and money and ultimately does not meet the needs, so cannot recommend in good faith knowing what is required. I do still have plenty come to me using QB so I usually have at least one QB client in the process of cleaning up big mess to get to compliant, so just inished 2017 for one of those and on to 2018.  I could make alot more money from them on QB since they would need much more help to do all the manual setups but not my main goal to do.

Sorry, I am new. What is P&L?

So "costs of sales" under COGS is for things I rent, to service a job, and charge a markup to a company? I categorize that cost under costs of sales, and when the company pays I split the transaction for both cost of sales paid from company, but where do I put the profit paid?  Cost of sales profit? Or under sales income?

Thanks

Thanks for posting here, @jenna_lee.

I'll be happy to answer your queries about recording the Cost of Good Sold.

First, P&L stands for Profit and Loss.

Cost of Sales and Cost of Goods Sold is the same. You can use either or both terms. You can record the rent to service a job and anything for running a production facility.

To record the profit, it is an income. But I suggest consulting an accountant to guide you on what account to use to avoid messing your book. 

If you don't have an accountant, click this link to find an expert who can help you best: Find an Accountant.

Check this article for more information about inventory assets: Understand inventory assets and cost of goods sold.

Let me know if I can be of more help about the Cost of Goods Sold. I'm always here to help.

Ethel_A,

Thank you for your response.  Just to clarify please because I was left still with a question mark -- you stated the profit is recorded as income, ok I get that. But what about the cost that is paid on top of the profit.  Where do I categorize that as income too? Or do I categorize that as COS too?

Because, I did just that, it is now zeroing out my COS because the costs are being paid back.

Example: I rent X for $300 I categorize that under COS. I charge X to a company for $500. That company pays me $500. Do I categorize the whole $500 as income under income? Or do I split it and categorize the $300 under Income COS or Income Rental Costs?  Then $200 as Income rental profit?  

I have been splitting it taking costs paid back under income COS (which I created myself), and then income rental profit.  But in P&L my COS is zeroing out - is that how it is supposed to be?  I am thinking not haha

Thank you, Ethel_A

In QBO you can change the report template to read "Cost of Sales" rather then cost of good sold.  QBDT still after decades of requests does not offer this option.  At least provide the report titles to be over ridden.  It's confusing for services based companies that do not sell goods that still need insight into profit margins.  I'm sick and tired of changing this stuff hundreds of times a month in Excel.

I agree!  I have been asking for this for over 20 years.  At least let us be able to change the naming structure for reports.  OBO you can change it and memorize but no ability to change this on QBDT. I have to literally change hundreds of reports in Excel monthly.  At least allow it for reports.  It even shows up as COGS for professional service companies.  Come on, that's just wrong. 

I was following this thread because I had a question about categorizing the services I provide to my customers as "services" or as "cost of sales". I am so new that I needed education on what cost of goods even are! This thread has been somewhat helpful, but I have more questions. I run a sole proprietorship cleaning business and do some organizing on the side. So, I have so far categorized all income from a cleaning client for instance under "services" (because that's what I thought it was, a service provided by me) and not a sale, will it show up as income on a profit and loss statement? 

Do I need to start categorizing what I do for my clients as a "sale"? And if so, what do I do about all the jobs I have invoiced for in 2022? Are they all wrong? How will I figure out my 2022 income?