Revenue Recognition Best Practices

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 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.

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.