The income statement of a consulting firm begins with consulting revenues. This is the income earned from the company's core business, consulting. Generally accepted accounting principles state that revenues cannot be accounted for unless there is convincing evidence of an agreement, that services have been provided, that the price is fixed or determinable, and that the collection capacity is reasonably assured. It's important to note that under these rules, other payments received, such as insurance income or future payments, are not considered income.
Care must be taken to determine that recorded revenues conform to generally accepted accounting principles. Any income you earn must be reported on your tax return. If you do consulting work for three or four companies, all of them will report their earnings to the IRS. As such, you have to do your part.
Plus, if you lose your Form 1099, you'll still have to file your taxes. Examples of revenues include merchandise sales, service fee revenues, subscription revenues, advertising revenues, interest revenues, etc. Revenue accounts are temporary accounts that facilitate the preparation of the income statement. However, when a corporation earns revenue, it has the effect of increasing retained earnings.
We can see this with the closing entries at the end of the year, which will transfer all balance from the income statements to retained earnings. In addition, if you use the best tax and accounting software for freelance consultants, you'll be better able to manage other revenues, such as gifts and bonuses. While manufacturing companies record the cost of goods sold, consulting firms do not sell the goods. Now that you know how to go about consulting, it's time to find out how taxes work for consultants.
As mentioned above, you must declare any income to the IRS, so it's essential that you determine the profitability of your consulting work, or any other side job. In the growing sharing economy, platforms such as Bonsai are an excellent resource to help you manage your career as an independent consultant. The fastest way to increase your income and earn more is to increase the average value of your project. If you want to know how you can earn more by communicating greater value, packaging and positioning your consulting offering, contact us here.
For external users of financial statements, operating expenses can be a central point for consulting firms; the level of operating expenses in relation to the company's sales sheds light on how frugal the company is and how small the company could be if there were a drop in sales. The consulting firm records all the direct costs of providing services, such as the salaries of consultants, the general expenses of consulting offices, the copying and research costs attributable to consulting contracts, and the additional benefits contained in this account. Finally, consulting revenues minus service costs give us gross margin, the first subtotal of the consulting income statement. Keep in mind that even if you pay these taxes on consulting fees every quarter, you must file your annual tax return by April 15. It's important to know the details of your consulting company to ensure that your finances are in order when you talk to the bank.
