What is the best method of recording accounting transactions for an IT Consulting firm? Specifically - When we have a consultant who performs a service for a client lets say that we bill $100 (Cost of Service Sold) . However, the rate that we pay our consultant is $60. How should these transactions be recorded?
In the Income section of your chart of accounts, establish an account called "Revenues". If you are interested in tracking the income derived from the various services you perform you can establish sub accounts to the Revenue account to manifest the services. When you bill a client, use the appropriate Revenue account.
When you "pay" a consultant, be careful not to run afoul of the IRS regulations about the difference between employees and independent contractors. The safest way to pay the "consultant" is through a payroll system and withhold payroll taxes and pay the employee's withholding and the employer's taxes to the IRS in accordance with the US and State payroll tax regulations.
The payroll becomes an expense of the business and, along with other business expenses, would be substracted by QB from the Revenues to arrive at a net profit or loss.
Dont try to match up the consultant's pay with revenues through your chart of accounts, Instead use the Job tracking via customers or the CLASS system when recording transactions. The CLASS system is very powerful and is capable of giving detailed reports for isolated activities.
I set up an item that will tie the consultants bill (independant contractor) or a payroll item (employee) to the revenue billed. Using "items" is a real time saver.
If you are not using payroll for the $60/hour, I would match these up with the chart of accounts.
Income: Consultant Income (you can probably find a better name)
COGS or Expense, Professional Services: Consultants Fees or COGS
That way you can see if the business as a whole is making money. Plus, it's really simple.
Of course, it would be ideal to find out which consultant is making you the most money, and you won't do that with the COA. You could do that with classes, or with an item for each consultant, as the previous poster was saying.
Have fun!
I hate to bring this back from the dead, but I was wondering if anyone could expand on this poster's comment:
""I set up an item that will tie the consultants bill (independant contractor) or a payroll item (employee) to the revenue billed. Using "items" is a real time saver.""
How exactly would the two be connected so you could report on which IC is making you the most money? Could you also do it by using sales rep codes?
I create a new Item with a "Type" of Service. I name the item as either the sub-contractors firm or their name and a suitable description that will appear on the invoice; for example "Joe Smith Consulting Time". Select the unit of measure as hour (in your example) then tick the box "This service is used in assemblies or is performed by a subcontractor". Once you click that, then update how you want the transaction to appear either on purchase or sales transactions, and enter in the cost and bill rates.
Select the appropriate expense account (I use a separate expense account "subcontractor costs") and an income account. Under preferred vendor, select the vendor account you have already setup for the consultant.
I also setup a group of "classes" that is called "Consultant". Each consultant I use has their own Class. I categorize all their hours entered with their class so then when I run a P&L by Class it shows me not only profitability by job, but profitability by consultant by job.
Works great for my Consulting business.
Should you consider consultant's revenue as "Cost of Service Sold" or "Service Revenue"
