When you’re purely in the field of selling services rather than goods, you clearly don’t have physical inventory, but you still sell something. That something is effectively time and what’s being done within the time. Of course to some extent it’s also materials used in the process, but they are marginal to the situation. So, as such your expenses are mostly employee related, but also services bought from third parties that are supportive to the end service you’re providing.

Now whilst with the employee related expenses the accounting is simple – they are charged to expenses when the employee has done his or her job – normally as a monthly wage, with services bought however the accounting is a bit more tricky. Let’s say that you’re providing commercial campaigns (i.e., TV commercials, etc.) for big companies and for that you sometimes need to buy preparation work (i.e., the TV commercial material) that’s going to be launched at a later date. Just to make sure you’re going to meet all deadlines, you’ve already asked the supplier to prepare the video. Now that you receive the video, you also receive an invoice for it. The accounting entry for this transaction is as follows:

Db: Work in progress (i.e. Inventory)
Cr: Payables to suppliers

Note here that this invoice does not go directly into expenses and the reason for this is simple – all expenses should be recognized in the same period the income they relate to is recognized. As such, the TV commercial you bought from the third party should stay in inventory until the actual sale is made to your customer. The entries then are as follows:

Db: Cost of services rendered
Cr: Work in progress (i.e. Inventory)

So as you see, the general idea behind the services is really the same as with goods. They are charged into expenses at the time of the sale and not sooner. The reason for us saying it’s trickier with the services is simple – they are just often seen as simple services acquired during everyday business and not seen as something just purchased for the sale and nothing else.