In part 3 of these series regarding the Chart of Accounts setup, I will delve into thinking about the various ways you can recognize Direct Costs in your Chart of Accounts.
Direct Costs (also can be known as Cost of Goods Sold or Cost of Services) can be recognized based strictly on what you are selling; in other words these costs will be a direct result, or have a direct correlation on what it costs the business to actually build a product or perform a service; this is not to be confused with administrative or overhead expenses.
The simplest way to think about this (and separate from your overhead), is perhaps the labor you hired to actually perform a service for your customers, or the materials you purchased to construct your product that sold to your customers.
The following are basic examples of Direct Costs, which are typically titled under the umbrellas of “Costs of Goods Sold” or “Costs of Services” in your bookkeeping. Be aware that these are just basic examples just to help you think of these costs to develop a gross margin or gross profit in your books, as opposed to your overall bottom line net profit:
- Supplies purchased in the construction of product that sold to customers.
- Subcontractors or employees hired to perform your services directly for the customers.
- Merchant Fees
- 3rd party payment processing fees, such as for credit card payments from customers.
- Inventory adjustments
- Adjustments needed to your inventory count as a result of a cycle count or similar events.
- Cost of Goods Sold
- The original purchase cost of the inventory item that sold to your customers.
- Allowances and Discounts
- Direct deductions on your invoices to your customers.
- These are sometimes included as part of gross income instead of direct costs.
- Seller Fees
- 3rd party distribution fees, especially from e-commerce or other regional and nationwide distributors.
Overall, it is usually a good idea to separate direct costs from your overhead costs, as this information can help you discern what it actually costs the business to perform one unit of billable labor or construct one unit of sold product.
Note: AccuraBooks is a bookkeeping firm only, so please consult with your C.P.A. for verification and clarification about the contents of this article.