I believe this issue has come up, however, this question may be a bit more precise.. or not. As a services company, when we simply pass-through our expenses (ie. mileage, prints, gas, m&e...), we list them as EXPENSES. I know most (almost all.. however, I'm sure there is a minority, here as well) will say this should be 1st in REVENUE and then simply OFFSET it as an EXPENSE to make it $0. Question 1: What if you DON'T IMMEDIATELY mark it as a 'revenue', but simply mark it as EXPENSE [of course NOT TAX DEDUCTIBLE], and simply TAKE IT OFF THE REVENUE COLUMN, and thus: NO "REVENUE INCOME" WAS EVER OFFICIALLY GENERATED. Can someone explain to me how this can be legitimate? or not? Question 2: MARK-UP: What if you use a research database and mark up the research and have the client pay it, thus, the company make a PROFIT. a) CAN YOU LABEL THIS PROFIT AS 'STILL AN EXPENSE'? and thus, avoid the Higher Income Tax? b) OR WOULD YOU CONSIDER THIS MARK-UP PROFITS AS "REVENUE" GENERATED FROM A 'NON-CONSULTING SERVICE' REVENUE (since it wasn't for consulting you generated this profit, but from a special deal you had to sweat and negotiate the contract with the research company). COMMON ANSWER TO QUESTION 2(b): It's Revenue. The MAIN QUESTION: Can you Mark Up Expenses and Make the Profit and Categorize it as an EXPENSE EVEN WITHOUT EVER ORIGINALLY CATEGORIZING IT AS REVENUE? Your analysis is quite helpfu. 'appreciate your input.
** TrIcKy Question /// Mark Up Expenses vs. Straight Pass Through ** Professional Consulting Services Co.
Answers
If you mark up expenses you are selling them (like any other product or service). Thus they are revenues.
You should have an account call something like Expense Revenue and one CGS Expenses (or multiple accounts).
GAAP (see other discussions) requires and I say from the point of view that you are making it a profit center for you to record it as revenues and CGS.
1
But if it were a Straight Through cost, would you ("CAN YOU") simply mark it as an EXPENSE, [even WHILE you spend the company's money BEFORE it is REIMBURSED]
instead of
1st marking it was as EXPENSE, and then zeroing-it-out as REVENUE AFTER ........ even though it is a straight pass through:
ie. $350 spent for the client.. then $350 Reimbursed back to the company's account.
Does it even matter?
I told you what GAAP is, how you handle it is up to you and those who utilize your financials.
1
With Quickbooks, however, it likes to categorize it as an EXPENSE and then, when you recoup it, to mark it as REVENUE.
This, still increases your REVENUE and thus makes the INCOME a "Taxable" Income - Why would one want to mark ANYTHING as INCOME if we had to PAY IT BACK?
I given the answer, and I would talk with your accounting professional as to the treatment and actual steps you should take.
Focus is on the WRONG financial statement which makes it more complicated than it really is.
The simpler approach would be to use BALANCE SHEET accounts. A Receivable or Advanced to (Asset) accounts. In essence, you will have 2 Receivable accounts for a/the client. One for the financing activity and another for the actual/business invoice. This can or may open up other revenue avenues. Explore charging for financing "fees" which should be a revenue account. The added benefit would be the availability of "financing" data and not buried in an invoice....thus separating the business models.
Above is for straight reimbursement. Mark up situations would have to be in the Income Statement (Revenue and Cost of Services/Items).
Just make sure that the arrangement (reimbursement) is well documented in the contract/s.