Cost recovery is a method of accounting that requires your business to recognize the amount of income you’ve earned for a particular transaction, but only when it’s more than what you spent to produce it. This means that your company won’t count your profit until you’ve recouped all of the expenses associated with that sale, including any overhead costs. It’s a great way to keep your books balanced, and it’s especially useful when you’re working with clients that may pay their invoices in multiple installments over an extended period of time.
Whether you’re running a business that sells products or services, it’s important to accurately record all of your income and costs to calculate your profits. You also want to make sure you’re recognizing your income as soon as possible so that you can continue to invest in new projects and grow your business. Choosing the right accounting method can be tricky, but using the correct method will help ensure that your financials are accurate and reflect what your business is truly earning.
Generally speaking, companies are interested in finding ways to maximize the benefit of any investment they’ve made, whether it’s a piece of equipment, a hired employee or even the initial startup costs of the business itself. This is why cost recovery methods are so popular with both accountants and entrepreneurs.
A cost recovery method is an accounting technique that allows you to recoup the original investment of any product or service you’ve sold, which gives you a more accurate picture of your true earnings. There are several different methods for doing this, such as straight-line depreciation, the IRS MACRS depreciation system and amortization, but they all have one thing in common: They delay recognition of your gross profit so that you can save on taxes in the long run.
For example, let’s say you hired a freelance copywriter to create all the content for a client’s website. You’ve already paid them a flat fee for the work, but you won’t record their payment until your income from the project exceeds the cost of hiring the copywriter. This is how you would use the cost-recovery method when accounting for this type of project.
The FreshBooks Support team is not certified in income tax or accounting, so we cannot offer advice on these topics outside of supporting your use of our software. If you need professional assistance, we recommend reaching out to an accountant in your area.
The EPA’s Superfund program is dedicated to recovering costs from PRPs, the private entities that are responsible for cleaning up environmental contamination. The EPA uses a cost-recovery methodology called a “demand letter” to request that the PRPs reimburse the agency for their cleanup activities. This is an administrative process that can take a considerable amount of time to complete. In addition to the demand letter, EPA also has the option of suing the PRPs to recover their costs if necessary.