Accounting of services provision

Commercial companies usually offer customers and partners not just the products but services as well. It may be the main or associated company’s activity. In any case, if the company provides services, they are subject to accounting.

According to the Tax Code a service is an activity, results of which have no material expression and are realized and consumed while such activity is being performed.

It is important that the service shall be recorded in the company’s financial statements despite the fact that it does not have a material expression. A term of providing a service should also be mentioned. According to the Tax Code this term implies the fee-based provision of services between individuals or legal entities. In other words, these are actions for which one of the contracting parties receives payment. 

Provision of services should necessarily be reflected in accounting, otherwise it is impossible to determine financial result. The law requires fee-based services to be documented by both parties: the customer and the provider of the service. Customer and contractor must have primary documentation to reflect the provision of services in accounting. Let us take a closer look at how the contractor and customer keep records.

Accounting services provision by contractor

From a financial point of view, revenue from the provision of services is a part of the income from the company’s activities. As a rule, revenue is recorded in documents at the date when services are rendered. What does it mean? The accounting department shall register the receipt of revenue during the period when the acceptance certificate or other primary document confirming the provision of services is signed. One of the mandatory requirements for the document is to contain details established by the Law «On accounting». Revenue from the sale of services is carried out on account 90 «Sales».

Company may incur expenses necessary for provision of services. From the legal standpoint, these costs are expenses by firm’s type of activity. Therefore, they are counted on the account 20 «Main production». However, credit of accounts varies depending on what exactly the funds were spent on. This can be raw materials, depreciation, social insurance, or payroll – all these relate to the company’s main production costs.

It is notable that when a company engages a co-executor, the paying costs for assistance of this individual or legal entity is recorded in the accounting as a part of normal expenses. Nevertheless, it is necessary to record debit of the account 20 with the credit 60 since support of the co-executor shall be registered as payments to suppliers and contractors and shall be included in the cost of sales.

The instructions on using the Accounting plan of accounts precisely describe the transactions for the provision of services. The accounting must reflect the fact of sale, tax accrual, cost write-off, and payment for services by the customer.

Accounting of services provision by customer

A company or a sole proprietor being a customer of a service accounts it differently from those who provide them. Unlike goods, services are consumed directly at the moment of rendering them. Therefore, expenses related to the sale of services are debited to the «Sales» account at the time of providing service without its intermediate accounting.

The customer recognizes the contractual cost of services provided (excluding VAT) as follows:

• expenses for ordinary activities, if the services are related to the normal activities of the organization (for example, production of products, sale of goods, performance of works);
• other expenses if the purchase of services is related to other operations;
• expenses for the acquisition of assets: fixed assets, intangible assets, goods, materials, etc.

Expenses are recognized on the date of providing service and they are documented at this moment. It should also be considered that the instructions on use of the Accounting plan of accounts require making transactions in the customer’s accounting as follows:

• Dt 20 (26, 44, 41, 08, 91.2 Ct 60 – the cost of services (excluding VAT) is included in the cost (expenses).
• Dt 19 Ct 60 – reflects the VAT presented by the contractor.
• Dt 90 Ct 20, 26, 41, 44 – the cost of services rendered was written off.
• Dt 68.2 Ct 19 – accepted VAT deduction presented by the contractor.
• Dt 60 Ct 51 – services paid to the contractor.

For the reason that requirements for accounting, financial documentation and reports may change, a competent accountant shall monitor legislative amendments.