Accounting for contracts

[michaelmc]

Hi,

I have started a couple of freelancers to do some contract work for me, they will be working for around a year and invoicing me monthly however I'm invoicing on the contract as I meet certain milestones which is likely to be in quarters.

How do I treat this in my management accounts? Thinking I should defer the freelance costs to the balance sheet until I invoice rather than having my monthly p&l look distorted, is this the correct treatment?

Thanks

 

[Ina Ivanova]

Hi there,

I think you should accrue the income. You'll get the contractors' invoices and pay monthly, and this expense WILL go on the P&L. Just accrue the part of the income that relates to the month.

If I'm wrong, please someone to correct me :redface:

I.

 

[michaelmc]

Thanks

I was thinking it would be easier to move the costs to a WIP type balance sheet account rather than try to estimate job completion etc for revenue recognition, just wasn't sure how that sat with accounting standards?

 

[Matt Knight]

For management accounts you can do what you like. For statutory accounts, I'd post the contractor invoices to WIP and release when you book the income each quarter assuming the invoicing follows revenue recognition rules for whatever regime you are reporting under. If not then a bit more work is needed to carve up both revenue and contractor costs in order that your accounts comply.

 

[Ina Ivanova]

Hi michaelmc,

As I'm not sure exactly what are the specifics in your case, you could check UITF40 appendix 1 at HMRC's site (can't post links yet, sorry), part 3 includes questions and answers that might be useful to you.

I.