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Level 1

Billable expenses for business management services (Recommended setup?)

Hello. This question pertains to a company that renders back-end services to customers (HR, payroll, customer invoicing, phone system, software, etc.). We basically manage the back end operations of professional firms allowing the professionals to focus on rendering their services to clients. My question pertains to a recommended setup for certain expenses incurred and billed to the client.

 

At the moment, we have an expense account called "Management Costs" which is labeled as a cost of revenue/COGS account, where these expenses are recorded when incurred. Examples include, SAAS subscriptions (Adobe, Microsoft, other software used by a client, etc.), phone system charges, allocated, certain marketing costs, payroll charges, etc. We mark up all costs by 5% and charge 5% of gross revenue. When the client pays an invoice with these hard costs, the revenue is distributed to Billable Cost Income and Mark-up Income.

 

The owners would like to clean up their income statements and want to classify these billable expenses as an asset rather than an expense and make all of the transactions balance sheet transactions. I would like to know if it's allowable to set up an asset account called "Advanced Client Costs" where the purchase transactions are recorded and then offset with payments on invoices. The mark-up would continue to be deposited in the mark-up income account.

 

Further, what are the A/R implications here? When an invoice is generated and issued to a client, if the cost is added to the balance sheet as an asset, does that now somehow appear twice (once in A/R and again in the advanced client cost account?)

 

Any suggestions would be greatly appreciated. We are in Florida, so no sales tax on any of this. 

 

 

Solved
Best answer January 11, 2020

Best Answers
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Level 15

Billable expenses for business management services (Recommended setup?)

COGS is the cost of goods sold, you are not selling any goods and should not be using COGS. When you file taxes COGS is calculated on the costs of inventory sold.

 

What you pay is an expense, usually posted to billable expenses
what you receive is posted to income (you can split it out if you want)
on the P&L income is reduced by expense, so only your mark up will hit the net income line (disregarding any other expenses for the office you might have)

 

If you move what is an expense to the balance sheet, you would have to post income to the same account on the balance sheet (part of the payment received). Posting income to the same account as expense is poor form and will lead to some awkward questions in an audit. I would not do it.

 

Yes if you post the expense to an asset account, then invoice, the balance sheet will show both numbers as an increase in assets, and equity as the offset. Then when payment is posted, that total asset number would drop. Wildly gyrating balance sheets are not looked upon favorably by bankers either.

 

Can you do it - sure

should you do it - not in my opinion

View solution in original post

3 Comments
Highlighted
Level 15

Billable expenses for business management services (Recommended setup?)

COGS is the cost of goods sold, you are not selling any goods and should not be using COGS. When you file taxes COGS is calculated on the costs of inventory sold.

 

What you pay is an expense, usually posted to billable expenses
what you receive is posted to income (you can split it out if you want)
on the P&L income is reduced by expense, so only your mark up will hit the net income line (disregarding any other expenses for the office you might have)

 

If you move what is an expense to the balance sheet, you would have to post income to the same account on the balance sheet (part of the payment received). Posting income to the same account as expense is poor form and will lead to some awkward questions in an audit. I would not do it.

 

Yes if you post the expense to an asset account, then invoice, the balance sheet will show both numbers as an increase in assets, and equity as the offset. Then when payment is posted, that total asset number would drop. Wildly gyrating balance sheets are not looked upon favorably by bankers either.

 

Can you do it - sure

should you do it - not in my opinion

View solution in original post

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Level 1

Billable expenses for business management services (Recommended setup?)

Just to clarify, I've labeled the "COGS" account as "Cost of Revenue" with sub accounts since it's a service based business. COGS is simply the account type used in Quickbooks since there's no cost of revenue account type. Does this create a problem?

 

Thank you very much for your response, extremely helpful, and I think provides the clarity needed here. Does not make sense to move these transactions to the balance sheet for the reasons you've stated. Thanks again.

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Moderator

Billable expenses for business management services (Recommended setup?)

Thanks for getting back, @scorpio0679.

 

The COGS is already a default account in QuickBooks. There shouldn't be a problem if you rename it according to the type of business you have.

 

I'm glad you got all the help you need from one of our Community Backers. If you need anything else, you can always drop by again in the Community space. 

 

I'll be around to help. Have a great day!

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