There are two ways to handle reimbursable expenses, and the one you pick affects how your financial statements look.

The gross method records the expense when you pay it and records the reimbursement as income when the client pays you back. Both your revenue and expenses increase by the same amount, so the net effect is zero. But your P&L looks inflated. If you bill $8,000 for your services and pass through $3,000 in materials, your revenue shows $11,000 instead of $8,000. That distorts your margins and makes it harder to understand your actual business performance.

The net method keeps reimbursable expenses off your P&L entirely. When you pay on behalf of a client, the amount goes to a balance sheet account like a receivable or “Reimbursable Expenses” asset account. When the client pays you back, it clears the balance sheet. Your income statement only reflects your real revenue and expenses, which gives you a much cleaner picture of profitability.

For most small businesses, the net method is the better approach. Your financials tell a more accurate story and your tax accountant has a clearer picture to work with.

In QuickBooks Online, the billable expenses feature makes this straightforward. When you record an expense, check the “billable” box and assign it to the customer. When you create that customer’s invoice, QBO will prompt you to include unbilled charges. You can also add markup at that stage if your agreement includes it. That markup is actual revenue to your business, while the underlying cost remains a pass-through.

The real danger with reimbursable expenses is forgetting to bill them back. It happens more than you’d think. You pay for permits, materials, travel, or subcontractor work on behalf of a client and then two months later realize you never invoiced it. Run an unbilled expenses report at least monthly. This is especially important in construction job costing where materials and sub costs flow through constantly across multiple projects.

If you handle a high volume of reimbursable expenses, build the review into your monthly close process. Reconcile what was paid on behalf of clients against what was invoiced. Any open balance is money you’re owed but haven’t asked for yet.

One more thing to get right up front is your client agreements. Spell out what qualifies as a reimbursable expense, whether you apply markup, and when you’ll bill for it. Vague terms lead to disputes. Clear documentation protects you and sets client expectations.

Getting the accounting treatment right from the start saves headaches down the road. If you’re unsure how your books are currently handling reimbursable expenses, a small business accounting firm can review your setup and make sure nothing is slipping through or being recorded in a way that misrepresents your numbers.