Billable Expenses: Accounting Foundations and Best Practices

Understanding Billable Expenses

In many industries, certain company expenses can be charged back to clients. This is especially common in construction and property maintenance, where technicians perform operations for client properties and pass through the cost of supplies with or without margins as agreed contractually.

The same principle applies in professional services like management consulting, legal services, or engineering companies. These organizations often pass through airline fares, hotel costs, or meal expenses, providing receipts as proof for client reimbursement beyond the contracted service fees.

Billable expenses are not true company expenses. They represent pass-through charges, i.e. costs incurred on behalf of clients. Therefore, accounting practices must correctly reflect their nature to avoid overstating or understating operational results and taxable profits.

How Billable Expenses Are Recorded

While operational expenses appear in the Profit and Loss (P&L) statement, billable expenses can be handled in two ways:

  1. Recorded directly in Accounts Receivable (A/R)

  2. Recorded in the P&L before being reclassified to Receivables

Each method has implications for accuracy, visibility, and efficiency.

Recording Billable Charges Directly in Receivables

Recording a billable charge directly in Accounts Receivable creates a clean transaction:

  • Debit: Receivables

  • Credit: Payables

This method simplifies accounting entries and keeps the P&L free from temporary inflations of cost and revenue.

However, this approach may reduce visibility into the nature of the expenses recorded unless supporting details are preserved. Organizations often mitigate this by adding descriptive notes or using sub-accounts to track expense types.

Recording Billable Charges Through the Profit and Loss Statement

An alternative is to first record the expense in the P&L, then reclassify it to receivables. This maintains visibility into the nature of the charge, which can be important for companies that want granular insights into their spend patterns.

The drawback, however, is complexity and inefficiency. The extra offsetting entry consumes accounting time, and temporary P&L distortions may occur as both expense and revenue entries appear before being balanced out. This can also overstate both cost and income, misrepresenting operational performance if not carefully managed.

Consult Your Tax Accountant

Whether billable charges are significant or occasional, it’s wise to consult a tax accountant to help you figure out what model is best for you. Incorrectly categorizing billable transactions can lead to material overstatements or misinterpretations in audits. A qualified accountant will help ensure compliance and optimize your recording process based on your specific tax jurisdiction and accounting rules.

Best Practices for Managing Billable Expenses

Once you’ve determined the right model for your operation, whether direct receivables or P&L-first, adopting best practices ensures precision and scalability. Here are the ones we would advocate for:

  1. Make billable charges easy to identify: ensure your system lets you clearly tag expenses as billable vs. non-billable at the moment they are incurred.

  2. Simplify partial billing: some expenses are only partially billable or shared across multiple clients or properties. Your platform should make splitting simple and accurate.

  3. Enable multi-allocation: allow charges to be distributed across customers, cost centers, or properties effortlessly.

  4. Automate account routing: once marked as billable, transactions should automatically post to the correct account (either receivables or expense) based on your chosen model.

  5. Preserve traceability: always maintain a record of the original transaction details. What was purchased, for whom, and why. This ensures transparency and supports future audits or customer inquiries.

Conclusion

Billable expenses are more than an accounting technicality. They shape how companies track cost responsibility and client transparency. Whether you manage maintenance services or professional consulting engagements, a well-structured billable expense process ensures clean books, accurate reporting, and stronger client trust.