As a consulting company we bill and make a profit on our time but occasionally we incur expesnes related to a job, which we bill to the client. My questions are
If the expenses are rebilled at cost should they be posted as an offset to the expense account, thereby reducing net expense to zero?
If they are rebilled at a profit should I follow the same process except that I will now end up with negative expenses (unless expenses from other sources more than offset the credit.)
Or should we bill the recovery as revenue and the underlying expenses as Cost of sales?
Would your answers be different if the profit was more than just incidental in relation to the profit earned from supply of services?
We always report total billings as gross revenue. Billings for project fees (time) in a separate revenue account than revenue from expense re-billings. We never net billings against expenses and show as a net zero expense in G&A expense. I suppose you could report expense in G&A if immaterial and not recurring. But if material and/or recurring you should report the expense above the line as cost of sales (direct costs), with a subtotal for Gross Profit on your P&L before deducting operating expenses.
With Rev Rec changes coming down the pike, here are two good whitepapers with important dates, changes and more:
"Countdown To The New Revenue Recognition Standard, ASC 606"
"Quick Guide to Revenue Recognition: Planning Your Move to the New Rules"
This question has come up more than a few times in my business expereiences. The answer always has been to record revenue as revenus and expenses as expenses. This will give you a much clearer of the profitabilty of each of your clients.
When in doubt, follow GAAP:
ASC 605-45-45-23 "Reimbursements received for out-of-pocket expenses incurred shall be characterized as revenue in the income statement."
There used to be diversity in practice, but the EITF addressed this issue in 2001 (the GAAP guidance was originally in EITF 01-14).
If expenses are billed at cost couldn't you record them as an asset (separate from accounts receivable) when paid to the outside vendor and credit that asset account when clients pay for them? If they are in a separate account you could reconcile recoverable expenses by job back to this client advance account. This would segregate revenue for fees (income statement) from the recoverable expenses (balance sheet).
Simon, even if you don't mark up these expenses Revenue is Revenue and should be recorded as such. The question is how to record the cost either as COS or G&A Expense....we travel our consultants and bill expense at cost without markup. We choose to record reimbursable expense as COS which yields no GM, but for us is preferable to 100% GM if the cost were G&A. Consulting is about 20% of our business.
We are a services company and follow the majority here as well. We have a "Fees" revenue line and a "Reimbursable Expenses" revenue line. We then have a Reimbursable Expenses COGS line. Assuming we are handling our billing correctly, they match each month and the Fees drop through to the GM line. Good luck.
The short answer; GAAP requires that you show the gross revenue and the gross cost-of-goods. No offset.
You must look at 605-45 for Principal Agent consideration.
The pass through costs are not outside your line of business and sound like they are a recurring event. I would consider them as revenue. A prior respondent suggested a separate revenue account with corresponding pass through cost of sales account. That would be a good way to ensure that you are passing through to customers all these costs incurred and are not lost in some other general expense account. Be sure to keep receipts and oher documentation should a customer ever question your billing.
GAAP rules, however materiality does play a role. For tracking purposes always keep items separate and do not net them. Your reporting can always net them if it is not material enough to report as Revenue and Cost of Sales. But due to materiality it would probably be netted as other income on your financial reports.
There has been lots of great input already but I would add 2 thoughts. The exception to showing the revenue and expense gross would be if the funds were placed in a "trust" account on behalf of a client, basically a separate bank account. This wasn't your example but I think it is the only situation you would not show as revenue and expense. This is more common with attorney's. Secondly, I went through an IRS audit for our corporation and the ONLY exception I received was that I netted shipping costs in one account rather than showing them separately as revenue and expense. So the IRS expects them gross just like GAAP.
As noted above, GAPP requires revenue to be reported as revenue and expenses as expenses. Expenses directly related to a job/project would be reported in your COS section since they are not your indirect / general / admin expenses. I like the idea posted above of having a separate revenue line for reimburseable expenses.
The answers on revenue recognition more than cover the topic I believe. A couple of related points to this topic - not directly related to your question:
1) Many companies consider it a best practice to invoice for expenses separately from consulting charges. The point of this is for collections - you don't want discussions/disputes with one part of the invoice slowing payment for the rest.
2) Isolating the revenue/cost for expenses into separate accounts is helpful from a 'making your ledger work for you' perspective - netting the two quickly ensures you are billing all of these costs.
What do you do for unbilled work in progress (i.e. travel expenses incurred but not yet billed to the client/customer/job) -- put the $ amounts into Prepaids to match with related revenue in the appropriate period?
Is this question in response to a construction firm? If so, then you would accrue the expense and recognize (accrue) income on the job in proportion to the expected job profit margin. If the expense is $100 and the job margin is expected to be 10%, you would accrue the revenue on the job of $110, with the accrued expense of $100. If it isn't for a construction then disregard.
The general practice by the big 4 accounting firms related to the handling of their client expenses is to keep them as part of cost of sales or indirects in their natural expense category and the client billings to appear as Revenues but in a separate classification; "Client Expense Revenues".
It appears that the majority does something similar of what most firms do.
Being a service company...
Expenses are recorded generally in the G&A section, instead of COGS.
If the client hopefully reimburses those expenses, then a separate income item is recorded as "Other income - reimb exps".
I have several clients that upcharge their expenses so what I do is book the actual expenses to an account called "CLEARING CUSTOMER EXPENSES" and then the invoice out to the customer has the line item pointing to the same expense account. I review that at the end of the month and if for example it was
Landscaping Vendor paid 300.00
Invoiced out to client 375.00
Resulting in a negative expense 75.00
I simply do a JE to move that 75.00 up to the an income account and that way that account is always zero.
The never ending cycle of matching the expenses to the revenues!
I believe you need to be careful on not billing back at cost due to the fact that you then may have sales tax implications. States are cracking down on contractors for not charging the sales tax on marked up costs or not breaking down the costs. Professional services need to be aware as well. Instead of trying to keep track of which expense was where - simply mark it as a marketing expense or a direct cost to the client. But I would suggest that you be careful of these markups due to sales tax risks.
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