One of my clients is providing a small amount of free labor for one of their customers. They are recording a liability for the portion of the labor promised, but not yet delivered to the customer, with a corresponding expense. What should the entry be when that labor is provided? The liability decreases, but does the expense reverse? We will not receive any money or compensation, so there is no AR or cash and I'm struggling to figure out what the other side of the entry should be.
Accounting entries for free labor for a customer
Answers
First off, why is your client doing this? If it is for charity, labor for charity is not deductible according to the IRS only costs directly associated with the chartable work are.
Additionally, according to GAAP non-profits do not even account for contributed services unless they are "specialized."
If your client truly is getting nothing in return and really wants to book this one conceivable option that is coming to my mind is the following journal entry.
Debit: Donated Services
Credit: Contributed Services (Equity Account)
If you need to clear out the liability account simply
Debit: Donated Liability Services
Credit: Contributed Services (Equity Account)
What the owner is essentially doing contributing services to the company and then turning around and disbursing to a customer.
Filed Under:
Accounting