DESKTOP EDITION CLOUD EDITION SERVER EDITION GUIDES FORUM

Allocating Billable Expenses to various Expense accounts


#1

Rather than having a single Billable Expenses account, would it perhaps be better to allow each Billable Expense to be allocated to a regular Expense account (e.g., Telephone, Travel, Motor Vehicle) with a special Customer Billable flag which, when checked, would allow the expense to be assigned to a particular customer?

That way, the invoice prepared for the customer could include the type of expense for each item – something many clients require – perhaps with the option for subtotaling by expense category.

Moreover, debiting the expenses to the various expense accounts (with a corresponding credit to a revenue account) when the outlays are reimbursed seems to be more in keeping with the FASB guidance on how to handle reimbursements for out-of-pocket expenses, unless that guidance has been changed or I’m misunderstanding it.


#2

The current Manager “Billable Expenses” account is an Asset (suspense) Account where specific purchases that are going to be directly reimbursed are placed. Generally these items could have been purchased by the client directly but delegated them as part of the “sale” arrangement. E.g. your previous example of the Marriot Hotel - your client could have booked and paid for that hotel room, but for your usage. In small business, this is a perfectly acceptable accounting practise.

The FASB guidance is targeted at public companies so that they all use the same accounting standards. The principle behind their guidance’s is Full Disclosure, a) no netting/contra of items - all payments and receipts must be shown separately as expenses and income, and b) the P&L must show all non capital cash flow transactions - so that the total revenue and total expenditure is disclosed to the stock market.

The question arises - if you want to adopt this FASB guidance, are you going to adopt all other FASB guidance’s? I think it would be extremely onerous to place public company accounting standards on small business - ever noted the amount of disclosure detail that needs to be tracked.


#3

Many of these accounting standards are created so public companies cannot mislead shareholders. For example, in this case they are saying all billable expenses should be booked as expenses, not assets.

It makes sense from their point of view. Imagine Enron thinking… our profit will look pretty bad to shareholders… what expenses we incurred that we could claim as “billable”? Let’s move them to assets. And magically, Enron is making big profit. This was the essence of Enron fraud. In their case, they were inflating their income when it fact they were increasing their liabilities.

In small business, you don’t need to follow these conservative accounting standards because you are not accountable to outside shareholders. Only to yourself.

If you spend $1,000 to buy a plane ticket for your client who will reimburse you… do you really want to put $1,000 as your expense and then $1,000 as your income? I don’t think so… why? Because these billable expenses will significantly inflate your total income and total expenses for no good reason.


#4

@jon raises an issue about accepted accounting practices that really has never been resolved in the 15 years or so since the FASB guidance he cited was published. Sadly, the guidance document itself is nearly incomprehensible unless you are a CPA. Regardless, I think @Jon has slightly mischaracterized the real underlying choices. Here is my view:

Two schools of thought are commonly followed on reimbursed expenses. One is that reimbursements are a form of revenue. The other is that reimbursements are reversals of expenses originally recorded to expense accounts.

The first viewpoint is the one covered by the FASB guidance. It is widely (and fairly) criticized for overstating revenues, making the company appear larger and more active than it really is, especially for services organizations with lots of pass-through expenses, such as travel. The important thing about this approach is that the reimbursed expenses account is an income account, not an expense account. It is credited and revenue is recognized when a sales invoice is created, just like any other sales account, while accounts receivable is debited. So, contrary to what @Jon suggested, the billable expenses never touch a standard expense account. A side point is that this approach is really only consistent with accrual basis accounting. So it won’t work very well for small, cash-basis companies.

(Interestingly, the FASB guidance was based on two key considerations. One was that reimbursed expenses are very much like shipping and handling costs, which are revenue. That finding itself is fairly ridiculous on its face, since a company does something to earn shipping and handling fees–its ships and handles, while it does nothing to earn the so-called revenue of reimbursed expenses. The second argument was that the company bears credit risk, since the expense is incurred before reimbursement. Yet that risk is generally very slight, because the customer will first have agreed to reimburse expenses and, most commonly, no profit is made because reimbursement is at cost.)

The second viewpoint results in recording of the net of expenses and reimbursements. This can be implemented in several ways. One is to use standard expense accounts, with contra entries, but this is not very clean. Another is to use special expense accounts, so the standard expense accounts pertain only to direct company business, not expenses on behalf of a customer.

A third way–the one Manager uses–is to treat billable expenses like work in progress and record them in a temporary asset account. The billable expenses asset account is cleared to accounts receivable by invoicing. No income or expense accounts are involved unless markups are added to the expenses, which go the a dedicated income account.

All of these approaches produce the same bottom-line results. The question is which produces the most representative picture of company position and performance. As @Brucanna said, the revenue approach of FASB is appropriate for large, publicly traded companies. But I think it does not present a valid picture of operations for a small company, whether a sole trader or a small corporation.

Just as I was ready to post this response, @lubos posted his response. He has said basically the same things in a more succinct fashion. The bottom line is that Manager’s approach seem most appropriate for the target audience of the software: small companies.