Eric,
you seem to be missing a couple of steps in your cost accounting at the
point of sale ( apart from not actually making a profit on your work.
You are not clearing the Assets :Inventory:Finished Goods account. This
is normally cleared to an Expense:Cost of Goods Sold account by
crediting the inventory account and debiting the Expense COGS account
by the value of the inventory so the sales entry should be something
like
Dr Cr
Income:Sales:Jobs $500+profit
Assets:Receivables $500+profit
Assets:FinishedGoods $500
Expense:CoGS $500
Your total direct labour costs are $400 not $500. When you have done
the work, you can either pay yourself for that work i.e. transfer the
funds to a personal account from the business account
Liabilities:Direct Labour $400
Assets:Bank $400
or if you retain the funds in the business what you suggested is
technically OK but it may or may not be in accord with business
practice and/or in your best interests. Your labour does increase your
equity in the business in this case.
You may want to label it as Owner's Labor Contributions or make it a
sub account to distinguish it from direct cash injections into the
business for example.
You will really need to talk to an accountant in your jurisdiction with
regard to whether taking personal payments for your labor or retaining
it in the business is more advantageous re minimising the overall tax
paid. It will depend on factors like the business tax rates compared
with your personal income tax rates and possibly legislative
requirements on a business.
David Cousens
On Sat, 2025-03-15 at 23:47 +0000, Eric Hammond wrote:
> Subject: accounting for business payment of direct labor
>
> I have received a partial answer for this previously, but I am not
> sure how to complete it:
>
> I work on computers, mostly I do the work, but sometimes contract
> out.
> All income is banked for bills/parts/supplies/services.
> Example: journal for Job 20230211.1 has:
> Process:
> 1 Assets:Jobs:2023:0211.WIP $500.00
> 2 Liabilities:Direct Labor $120.00
> 3 Assets:Stock $100.00
> 4 Liabilities:Direct Labor $180.00
>
> 5 Finished Goods $500.00
> 6 Assets:Jobs:2023:0211.WIP $500.00
>
> Billing:
> 7 Assets Receivables: $500.00
> 8 Sales:Jobs
> $500.00
>
> Payment goes into the bank account
>
> IF the labor is someone I hire, I pay his invoice, and the $500
> leaves the bank
>
> Liabilities:Direct Labor $500.00
> Liabilities:Payables $500.00
>
> Liabilities:Payables $500.00
> Assets:Bank
> $500.00
>
> Normal, clean, easy...
>
> But if the labor is me, the money stays in the bank, and the
> liability is unresolved.
> One suggestion to clear the liability is:
>
> Liabilities:Direct Labor $500.00
> Equity:Owners Contribution $500.00
>
> What reduces the effects of the Equity:Owners Contribution?
> The cash does get spent on rent, parts, bills, etc, but the $500 (or
> other) keep increasing the equity in net worth, and other, reports.
> Obviously, I am missing something. I appreciate any comments / help
>
> Thank you for any help!
>
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