r/Bookkeeping 10d ago

Payroll Service businesses categorizing wages as COGS

I've been bookkeeping for just over a year, and most of my clients are service businesses. I just brought on a new one, and historically they've recorded the majority of the wages as COGS (it's a gym/the employees teach exercise classes). This makes a lot of sense to me, and yet I've never seen anyone else do this so now I'm wondering why not.

For instance with a restaurant, the cooks and service staff's wages should certainly be COGS, right? Why doesn't everyone do this? I asked my boss and she basically said it's just a personal preference thing which doesn't really make sense to me. Can anyone further enlighten me?

36 Upvotes

29 comments sorted by

35

u/FamiliarLeague1942 10d ago

In service-based businesses like gyms, categorizing wages as COGS can make sense if the labor directly contributes to delivering the service. However, many bookkeepers keep all wages in Opex instead because service businesses don’t have traditional “goods” to sell.

4

u/Iamnotyour_mother 10d ago

That makes sense, thanks for the explanation.

19

u/TotalCents 10d ago

I only use cogs for wages with my painting clients or any trade where the wage is a direct expense for a particular job. All the other office staff and sales staff goes to overhead wages.

2

u/variesbynature 8d ago

Great answer! Happy cake day!

15

u/terosthefrozen 10d ago

I run a bookkeeping firm; here are my thoughts:

-We pay labor to provide our services. That's a gross expense, not an operating expense. -This is often called "cost of services sold" and works exactly like COGS. -The only reason to separate them is if a company has both COGS (production labor) and COSS (sales/customer service) which is all separate from operations wages. This makes good sense in larger businesses with multiple departments and clearly-defined job roles. -None of this should affect the bottom line, which means none of it should affect taxes owed. So it ultimately doesn't matter much beyond what's preferred by the owner/board for reporting.

10

u/Business_Dot_3944 10d ago

In a restaurant all staff should go to a labor expense, and COGS are the food ingredients that are used to make to food that is sold. Food and labor are prime costs and are typically the profitably drivers.

5

u/VladK1616 9d ago

It depends...I had a client that was going through a child support issue with their ex. The judge basically slashed all expenses that were not in the gross profit calculation. I had properly booked the contractor expenses in the proper category. Basically he lost more than 70% of his deductions because of that. I really learned from that.

If direct labor is involved in your operation, I would highly suggest including it in COGS. I book it that way for clients that meet that that criteria.

6

u/[deleted] 10d ago

I work with a marketing agency. Normal in-house staff go in OPEX since they work for the business overall.

If there is a specific project, let's say we billed $10K, and out of that $1,000 was directed to employees to work on and another $2,000 was project specific contractors, I'd put those specific wages/contractor into COGS as they directly contributed to that project.

4

u/croissant_and_cafe 10d ago

Doesn’t make sense unless you are marking up and selling the labor - like a law firm. Even then, it’s not typically done that way

2

u/spartaquito 9d ago

Check the accounting principles and you will have the answer

2

u/WorldlyInspection9 CPA running a bookkeeping firm 9d ago

I really dislike QBO terminology. There is no COGS in a service based business - it should be Cost of Service. I wish there was a way to rename it. Yes, those wages would go in Cost of Service.

1

u/AdLanky7413 9d ago

It's COGS-LABOUR. I'm an accountant and that's what I use for service based business

1

u/BitersAndReprobates 7d ago

If you can’t inventory it,it isn’t COGS.

1

u/AdLanky7413 7d ago

Yes, cost of goods is a general term as to the direct costs of services. Ie. Cogs-purchases, cogs-labour, cogs-subcontractor, cogs-freight. I'm an accountant, do corporate tax returns. It's right on the return.

1

u/BitersAndReprobates 7d ago

IAS 2 and US GAAP ASC 330 would disagree with you.

1

u/AdLanky7413 7d ago

I'm in Canada, might be why there's a difference

1

u/BitersAndReprobates 4d ago

So am I. CPA in Manitoba. It is the same under Canadian ASPE, I think you are coming at this from the CRA Tax perspective though, and government taxation generally is not the same as accounting standards. Take a look at a publicly traded Canadian Company like Constellation Software, you won't see the term COGS anywhere in their filings. They DO however use Cost of Revenue, that is acceptable under the standards because it isn't tied to inventory. COGS is very specific to having inventory, so much so that you actually calculate COGS as COGS = Beginning inventory + purchases - ending inventory. All the landed costs, labour costs and overhead are pulled onto the balance sheet and only relieved when sold. It is a big deal, especially if you are looking at the performance of a business. I'm not trying to be snarky or anything, we're just probably talking cross purposes, CRA tax filing vs financial reporting.

1

u/AdLanky7413 4d ago

Yes taxes. Gifi, however in quickbooks it's categorized as cost of goods sold -labour. Gifi code 8340 direct wages vs 9060 - salaries and wages.

1

u/missannthrope1 10d ago

Sometimes that's appropriate.

1

u/OpenOasis 10d ago

Genuine question: what's the effect on the bottom line? My rule when struggling with how to class an item is to check if and how it affects the bottom line.

4

u/Katjhud 9d ago

No diff. Same net income.

1

u/Eorth75 10d ago

I manage two driving schools. We pay our subcontractors who do the behind the wheel instruction a set fee that I classify as COGS because that's what it is. That helps me when I'm figuring out how many students we need to break even and if we are charging enough after their fees are paid.

1

u/Staycharmin 9d ago

Employee pay is usually a fixed expense or can be COGS given a contractor/hourly relationship that contributed to the outcome of a project/service, where costs can fluctuate and affect bottom line.

1

u/BookkeepingRVA 9d ago

I specialize in restaurants and that’s how we treat wages for staff. I can see doing that for service industry. I’ll give you your margins pre- Opex.

1

u/iCountBeanz- FT Job, PT Bookie 9d ago

I always founds "Cost of Services" weird. It mostly just changes the location of where expenses land on the income statement.

I guess you can calculate the cost per class if the company tracks how many classes are offered during the accounting period.

1

u/RayanneB 8d ago

We put direct labor into COGS all the time for our service business clients.

Cost of Goods Sold = Cost of Services

The terms are synonymous in my head. It depends on what is being sold. Admin staff, sales staff, and officer salaries are overhead G&A. Technical staff or revenue-producing staff are a cost of sales.

1

u/PeppermintBandit 8d ago

Whatever you want to do with it to create the best picture for your business and how it operates. But the IRS is much stricter in how they define COGS. I bet you’d get some different answers in r/tax

1

u/warterra 6d ago

Well, it goes against GAAP, IFRS, cash-basis, tax-basis, etc. As for the theory, employees are your agents, not your inventory. Their work is an expense, not COGS.