As a small business owner, it`s important to keep track of your expenses and understand the different categories they fall under in your accounting software, such as QuickBooks. One common question that arises is whether subcontractors should be classified as cost of goods sold or expenses in QuickBooks.
Cost of Goods Sold (COGS) refers to the direct costs associated with producing or delivering a product or service that is sold to a customer. This includes things like the cost of materials, labor, and shipping. In QuickBooks, COGS is a separate account that is used to track these direct costs.
Expenses, on the other hand, are the indirect costs associated with running a business, such as rent, utilities, and advertising. These expenses are necessary to keep a business running, but they are not directly related to the production or delivery of a product or service.
So, where do subcontractors fit in?
Subcontractors are individuals or companies that are hired by a business to perform a specific task or service. They are not employees of the business, but rather independent contractors or freelancers. For example, a construction company may hire a subcontractor to install plumbing in a new building.
In general, subcontractor costs should be classified as expenses in QuickBooks. This is because they are not directly tied to the production or delivery of a product or service. Instead, they are an indirect cost of doing business, similar to rent or advertising.
There are some exceptions to this rule, however. If the subcontractor is directly involved in the production or delivery of a product or service, their costs may be classified as COGS. For example, if a manufacturer hires a subcontractor to assemble a product, the subcontractor`s costs may be considered part of the COGS.
It`s important to note that improperly classifying expenses in QuickBooks can have consequences for your financial statements and tax filings. If you`re unsure how to classify subcontractor costs, it may be helpful to consult with a bookkeeper or accountant.
In conclusion, subcontractor costs should generally be classified as expenses in QuickBooks, but there are some exceptions depending on the nature of the work performed. As always, it`s important to keep accurate records and consult with a financial professional if you have questions.