There are three ways people try to record reimbursable expenses in QuickBooks, but only two of them should be used. Here are specific details about each, with ideas about which you should use.
Method 1 – The Expense Tab/Expense Account Method: When recording an expense incurred for the customer, click the Expenses tab from the Write Checks or Enter Bills screen. Select the appropriate expense account, select the appropriate customer, and do not check the column with the invoice icon above it (also labeled “Billable” in later versions of QuickBooks). Save the transaction. You can now generate an invoice for the customer, and drop the transaction into the invoice after clicking the Time/Costs button.
Behind-the-Scenes Details of this Method: Using this method causes the expense account to be credited when the invoice is generated for the customer. This lowers the expense account rather than increasing a sales/revenue account. If users want this – if users do not want the reimbursed expense to be recorded as income, then this method should be used.
Method 2 – The Expense Tab/Cost Account Method: Similar to Method 1, click the Expenses tab from the Write Checks or Enter Bills screen when entering an expense for a customer. Instead of selecting an expense account, select a COGS account. Then select the appropriate customer. Unlike with Method 1, notice that the column along the far right side cannot be checked.
Behind-the-Scenes Details of this Method: It creates unbillable “Unbilled Costs.” These will show on the Unbilled Costs report, but when the Time/Costs button is clicked on the Invoice screen, they do not appear in that window. In other words, these will remain, forever, on the Unbilled Costs report ,and can never be dropped into a customer’s invoice. Because of this, this method should never be used under any circumstances. If it is necessary to post to a COGS account, follow Method 3.
Method 3 – The Items Tab Method: Go to the Items list, and create a new Other Charge item. Click the box that says, “This item is used in assemblies or is a reimbursable charge.” This sets up the item so it can be used effectively on the Write Checks/Enter Bills screen, and the Invoice screen. Fill in the item with the desired COGS account in the left hand box, and desired revenue account in the right hand box. Fill in other information as needed.
Then, when writing checks or entering bills for reimbursable expenses, instead of using the Expenses tab, click the Items tab and select the item just created. Fill in the correct amount, and do not place a checkmark the column on the far right side. Save the transaction.
When invoicing the customer, click the Time/Costs button, and the item used above will appear. Select it, and QB places it onto the customer’s invoice. Save the transaction.
Behind-the-Scenes Details of this Method: When using the item in the Write Checks, Enter Bills, or Enter Credit Card Charges screens, the amount will post to whichever COGS account was chosen when setting up the item. When using the item in the Invoice or Sales Receipts screen, the amount will post to whichever revenue account was chosen when setting up the item.
This is the method to use if you take a markup on the reimbursement. It adds the customer’s reimbursement to the revenue, and is the only method that allows for a gross margin to be determined without creating unbillable “Unbilled Costs.”
This method can be difficult because it takes some thought to get the Item set up correctly. In the Edit Item screen, careful attention must be given to assigning the correct COGS account on the “Purchase Information” side, and also to the correct sales/revenue account on the “Sales Information” side.
Another reason this method can be difficult is that your company may want to post to various revenue and COGS accounts for various reimbursable transactions. If this is the case, then individual Items will need to be established, each customized according to the accounts they need to post to.
Most people will probably follow Method 1, but a few will want to follow Method 3. If you need more help to decide, seek professional advice from a Local accounting expert.