I got services – should I account for this? How?

The accounting for receiving services doesn’t differ much from the entry made when purchasing something. You essentially still bought something, but this something isn’t an item and you shouldn’t put it into your inventory hence there’s just one place to charge it – into expenses as you got the service or split over the period the service is received (i.e. if it’s a commercial that’s shown two months in a row, the expense should be accounted 50% in one month and 50% in another month making it a prepaid expense on your balance sheet at the end of the first month).

The accounting entry you do is as follows:

(1) Debit                                (2) Expense account

(3) Credit                              (4) Cash / (5) Payable to suppliers

Let me explain now what this accounting entry is about.

(1)      Normally accounting entries start off with the debit entry to ensure consistency. Now since you bought something, this debit shows that you made an expense.

(2)     The amount paid is charged into expenses and namely onto the account the expense most relates to, i.e. when you bought some commercial services, it’s to be shown on marketing expense accounts (in case you’ve got several, do make sure you pick the most appropriate one).

(3)     As every accounting entry has two sides, there’s something to be credited.

(4)     One thing you can credit, in case you paid right away on cash, is the cash balance obviously. You had to give up some of your assets and hence the crediting of your resources.

(5)     In case you didn’t have to or didn’t choose to pay with cash, you’ve got yourself a liability that’s to be settled later on – a payable to supplier. That’s also something that’s done with credit entry as you’re increasing your liabilities. You didn’t pay right away but you did get the benefit, the commercial. As such you owe something to the supplier and your balance sheet should reflect this liability.

As you can see, it doesn’t differ much from when you buy items. The only real difference is the fact that items you can put into inventory and expense when they are sold. With services you’ve got to follow one simple rule – charge into expenses when the service is received or into the period the service relates to. If you’re paying rent upfront for a period in two months time, it’s in your prepaid expense up until the month the renting is actually happening. Always, always check the period the service is received.