For the novice accounting individual the use of the term "expense account" is a brand new toy, and the further refining of the expense accounts needs by industry has not yet been approached. Now is the perfect opportunity to examine expense accounts needs by industry, and provide some further definition to the methods used for establishing and using certain expense accounts.
Some expense accounts are necessary, no matter your industry. Expense accounts for salaries, wages, insurance, legal and professional services, miscellaneous, advertising and office expense, are generally used by every industry and business type. There are some expense accounts, however that are unique to the service industry, and we're going to examine most of those in this article.
Generally, there is no cost of goods sold expense, because there is no product manufactured. There is however labor costs that are considered a part of the expense in providing the service, there must be a separate labor expense account associated with the provision of the service. There must be expense accounts for office supplies and office salaries, as most of the expense in a service industry is incurred in the administrative area.
Travel expense is another expense account unique to the service industry. Quite often, in providing your customer with your services, you will be required to travel to the customer's location. Meals and entertainment expenses are normally a hand in hand expense with traveling expenses.
Dues and subscriptions are normally a service industry expense that you won't find in merchandising or manufacturing. Continuing education can generally be used in both industries, but is most often a service industry expense.
What characteristics do most of these expense accounts share? They are expenses involved in the course of providing a service rather than a product. Travel, meal and entertainment, dues and subscriptions, labor costs associated with the goods or services provided, and continuing education expenses are all directly tied to a human element.
The service industry is some form of service provided by the human element in a company. Service of your computer needs, laundry needs, right on down to your nutritional needs, are human element operations. They rely on a human being to fill the need. Nothing is manufactured, nothing is assembled, and nothing is produced.
This unique difference puts the service industry in a different arena when accounting for the flow of cash into and out of the business. Cost accounting, as it pertains to the manufacturing environment, does not exist. The expense accounts are a greater factor in determining profit and loss than the cost of goods sold. There generally are not inventory expenses, because your services are not a shelved product. There are not direct costs of goods expenses, because no raw materials are required to provide a service. Accounting itself is a service business. The accountant provides a customer with their services, not a tangible product. There is no differentiation of importance between industries, or businesses, as neither industry segment could exist without the other.
Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.