When should we put salary under cost or expense?


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We are currently structuring our book accounts and really do not have any idea when should we put employees salary under cost or expense. Some said that we should put it under cost but some others put it under expense. Some even said that manager's salary is under expense, but the salary for those that produce the product should be under cost. We are a software as service company. Can anybody assist us on this?

Accounting

asked Aug 3 '11 at 21:10
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Jpartogi
1,342 points
  • What did your accountant say? – Elie 9 years ago
  • Please forgive my ignorance but are you using cost as a proxy for cost of good sold or direct costs and expense as variable or indirect expense? – Finance Mentor 9 years ago
  • Finance Mentor, I don't know what is the best approach for software company. Programmers in one hand is a cost to the production of the software, so I can put it under COGS. Or can their salary should be counted as variable expense? – Jpartogi 9 years ago
  • You should probably talk to an accountant on this one, as it may have tax implications - especially if you need to assign a value to work-in-progress. – Mike 9 years ago
  • It can get even murkier, since you can view much of the programming activity for a "software as a service" model as research and development of the service, rather than the actual delivery of the service itself. That effort can be (depending on your chosen accounting practice) a depreciable asset that must be expensed over time using a depreciation schedule. So what's the right answer? Unfortunately there is no generic answer except to consult an accountant (preferably with experience in your industry). – Ttongue 9 years ago

1 Answer


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IT companies usually assume programmer's salary as an operative expense, take a look for example to salesforce Income Statement (item Research Development):

Usually Costs of Sales regard some type of variable cost involved to the sale. Rule of thumb is no sale no cost. It is unlike you could treat a programmers's salary like that unless you are reselling his/her working hours and he/she is payed per billed/hour. Usually you pay programmers independently of the amount of sales.

In other companies, which involve blue collar labor, you could put worked hours as a direct cost, because for instance you need 200 hours to produce 200 cars, and if you put 400hours you could get 400 cars.

Since in software the input and the output are not correlated that way I wouldn't put it as variable cost. Again, development is usually a sunken cost so an accountant may figure out ways of presenting it more appropriately in the Financial Results(balance sheet, income statement).

answered Jan 26 '12 at 12:27
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Pdjota
532 points

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