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.
