Cost of Sale Accrual Account for Projects Invoiced Upfront
mavricdebeyer
Member Posts: 2
I am wondering how others account for the Cost of Sale associated to invoices that may be issued ahead of being invoiced for the CoS by a range of vendors?
We begin projects by issuing an invoice for payment, usually a deposit. These projects will have associated estimated costs. However it may be several months before we are actually billed for those costs.
To match the invoice record to an estimated cost, for realistic P&L, I would like to set some sort of single accrual account for estimated Cost of Sale that pertains to that specific project. The easiest would be just a total amount (I don't really want to create separate entries for each vendor, as there could potentially be a lot of vendors.). The idea is that then 2-3 months later when the actual costs come through we can record them as per normal, and then perhaps adjust the figure on that original accrued estimate account until it zeros out.
That way we would not be doctoring P&L figures from earlier periods and re-reporting internally. Also could be a good thing if the Income TAX period is due to close soon after invoicing for that payment, and it looks like we've made way more profit than we have.
Bearing in mind I'm not an accountant, is this good practise? If so, how would one set this up in Wave?
Thanks!
Comments
Hi @mavricdebeyer.
Your best option wouldn't be to create an invoice until you have the final numbers, but instead, work off of an estimate. Instead of taking a deposit as a payment for that invoice (or a partial payment), add it as an income transaction categorized to a deposit holding account. You'll have to create that account yourself. Once the invoice is created, find that original deposit transaction and change the category to make it a payment to that invoice.
The reason why you shouldn't create an invoice before the work is done is that, in accrual accounting, when you create an invoice, you create an Accounts Receivable transaction immediately. That money is considered yours. For money to be considered yours, however, you have to have performed the service in question. Your client can only owe you money once you've done work for them.
If you want to keep track of expenses made within the context of a project, you can absolutely do that through a custom expense account.
We also have an article on how to handle reimbursable expenses on our Help Center that you might find useful, you can find it here!
Does this answer your question? Let me know if you have any follow-up, I want to make sure we're on the same wavelength.
Hi @Alexia
Thank you for this, I believe we're on the same page for sure. I'll go check up on the specifics of using Estimates in Wave. Sounds like a similar practise of using Proforma Invoices.
Loving Wave btw, I think it hits its target market perfectly. Hopefully we'll see Payroll support outside of North America in the not too distant future (South Africa, please!).
I'm really happy to hear Wave is working for your business. If you think of anything we could do better to make your life easier, make sure you let us know. Feedback from our users has a significant impact on how we choose what to build next, so if you think of something, we're always happy to discuss it in the Community!
We would love to expand Payroll outside of North America, @mavricdebeyer. One day, I'm sure it'll be in the cards! There's a lot of details to consider first, so I can't promise anything, but we're a pretty ambitious bunch.
We do have an article on estimates in the Help Center, if you want to give it a read. It's just a step-by-step guide, but it might help out.