Attributing expenses to paid invoice

Good morning. I'm new to B&RP and am looking for some guidance: I create an invoice for consulting work (ex: $10,000 for consulting and $5,000 for expenses) and submit same to customer. Customer pays invoice in full. However, expenses for this work will be incurred over a period of months after the invoice has been paid. How do I initially handle/categorize the $5,000, and then also go back and attribute incurred expenses to this invoice once it's shown as paid?
Thanks in advance for help offered.

Best Answer

  • Tom Young
    Tom Young SuperUser ✭✭✭✭✭
    edited December 2020 Accepted Answer
    "How do I initially handle/categorize the $5,000"
    The classic accounting method for this situation is to put that $5,000 on your balance sheet as a form of liability titled something like "Deferred Revenue." 
    As you incur expenses and record them as such, you make entries to the Deferred Revenue Account to reduce that $5,000 balance appropriately, with the offset to the entries recorded in some "revenue" Category.
    "then also go back and attribute incurred expenses to this invoice once it's shown as paid?"
    The mechanics of making the entries to the Deferred Revenue Account depends on how you've established the handling of expenses with your client.  So, for example, if you claim a markup on actual costs - 20% say - then the reductions to the Deferred Revenue Account would be calculated as (actual costs x 120%).


Answers

  • Tom Young
    Tom Young SuperUser ✭✭✭✭✭
    edited December 2020 Accepted Answer
    "How do I initially handle/categorize the $5,000"
    The classic accounting method for this situation is to put that $5,000 on your balance sheet as a form of liability titled something like "Deferred Revenue." 
    As you incur expenses and record them as such, you make entries to the Deferred Revenue Account to reduce that $5,000 balance appropriately, with the offset to the entries recorded in some "revenue" Category.
    "then also go back and attribute incurred expenses to this invoice once it's shown as paid?"
    The mechanics of making the entries to the Deferred Revenue Account depends on how you've established the handling of expenses with your client.  So, for example, if you claim a markup on actual costs - 20% say - then the reductions to the Deferred Revenue Account would be calculated as (actual costs x 120%).


  • RickHenn
    RickHenn Member
    Thanks, Tom. I will give your suggestion a try. Very much appreciate your time and expertise. Sorry for late reply, OOT for Christmas with no laptop. Nice break!
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