Materials on invoices and cost of sales in the pack
How materials a contractor invoices will post revenue and cost of sales in one journal once invoice lines name a product, and what to agree first.
By Achekam · · 4 min read · For Construction businesses in South Africa, Nigeria, Kenya
Launching soon. The Industry CRM add-on described in this article is launching soon. This article describes it as it will work at launch.
Plenty of contractors sell materials as well as work. A shopfitter supplies the counters it installs. A tiling contractor buys the client's chosen tiles and charges them on at cost plus handling. A small builder keeps a yard of bricks, sand and cement and sells some to clients doing their own extensions.
When those materials go on an invoice, two things should happen in the books: the sale is recorded, and so is what the materials cost you. Most small contractors find that only the first happens, and the gross margin on materials is something they work out on a spreadsheet, if at all. This article explains how that changes once invoice lines name a product, and what to agree with your accountant first.
Today: typed lines and one revenue account
On Achekam's ordinary invoices, lines are typed in. They cannot be picked from the business's product list, so an invoice does not move stock or post cost of sales. All invoice revenue posts to one account, Professional Services Revenue (4100), and a line cannot name another sales account.
For a contractor selling materials, that has two effects. The materials income is mixed with labour and contract income in one account. And the cost of the materials sits wherever the supplier's bill was posted, often in a general materials account, with nothing tying it to the sale it supported. The income statement shows the totals, but not the margin on materials.
Lines that name the product and the revenue account
With the Industry CRM's second wave, an invoice line names the revenue account and the product it sells. Revenue is then posted per account, and cost of sales in the same journal as the sale.
A worked example in words. A contractor invoices a client for tiling a bathroom: a line for the tiles the client chose, a line for adhesive and grout, and a line for the tiling labour. Each materials line names its product. When the invoice is issued, one journal records:
- the sale of each line to the revenue account it names;
- the output VAT;
- the cost of the tiles, adhesive and grout as cost of sales.
The labour line carries no product cost, because the cost of labour sits in wages. At month end, the income statement shows materials income and the cost of those materials together, and the margin is visible without a spreadsheet.
The underlying idea is the familiar one of cost of goods sold. Investopedia's guide to cost of goods sold explains it as the direct costs of the goods a company sells, and the methods used to calculate it.
Cost of sales in the same journal as the sale
The cost that posts is the product's cost price. Here an existing limit applies: cost of sales uses the single cost price typed on the product, with no FIFO or weighted-average costing. Materials prices move constantly, and a cement or steel price that was right in March may be well out by September. If the cost on the product is stale, the margin on every invoice that names it is wrong in the same direction.
So the quality of your materials margin depends on how you keep product costs. That is the conversation to have with your accountant before the first invoice goes out.
Accounts the pack adds when it is switched on
Switching on the Construction pack adds that industry's revenue accounts to your chart of accounts, and its unpriced starter items to the catalogue. Its starter catalogue lists contract works, preliminaries and generals, retention release, variations, and daywork labour and plant, posting to Contract revenue (4370) and Variations and extras (4380). Materials you resell are not in that starter list, so they need products of their own, priced by you.
If an account code the pack wants is already used in your chart for another type of account, activation is refused, and the message names the account. Check your chart before switching on; a chart of accounts for a building contractor suggests a layout that leaves room for the pack's accounts and your own materials accounts side by side.
Agreeing cost prices with your accountant first
Before you name products on invoices, settle these points:
- Which materials become products. Items you sell often and in recognisable units, such as a bag of cement, a tile range or a sheet of board, suit a product. One-off items bought for a single client may be better left as typed lines.
- What the cost includes. Supplier price only, or delivery and handling too.
- How often costs are reviewed. Monthly for volatile materials, less often for stable ones.
- Which revenue account each product posts to. Materials income on its own account, or within contract revenue.
- How differences are corrected. When a typed cost proves wrong, who calculates the difference and posts the correcting journal.
Write the answers down and keep them with your product list.
Then test the arrangement on a small scale. Set up a handful of the materials you sell most often as products, invoice them for a month, and read the income statement at month end with your accountant. If the materials margin looks believable, add the next group of products. If not, the fault is usually a cost price, and it is far easier to find among a handful of items than among hundreds.
Where this fits
Materials are one strand of a contractor's income. Contract works and variations have their own accounts, explained in contract revenue and variations, and daywork is priced at your own rates, as setting daywork and plant rates describes. Start by listing the materials you sold on last quarter, and mark which would become products.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
