Cost recovery is an accounting term that describes the way a business recovers any expenses it incurs. It is a specific method of bookkeeping that takes into account the fact that some costs are not recovered immediately, or even within the same year in which they were incurred. Cost recovery is a useful method for tracking and recording financial activity, and it can help businesses stay in the black and able to meet their financial goals.
There are many different types of costs that can be recovered through cost recovery methods, and the specifics vary depending on a business’ situation. Generally speaking, any expense that is incurred by a company to perform work or provide services can be recovered through the use of this method. This can include everything from a worker’s salary to the cost of a new computer. In some cases, the cost of an employee’s health insurance can also be recovered through the use of this method.
If a business is not sure it will receive all of the revenue it invoices to a client, or there is uncertainty about when that will occur, utilizing the cost recovery method of bookkeeping can be helpful. For example, let’s say Sam owns a small business that contracts with Gilbert to write copy for its website. Because Sam is unsure whether Gilbert will pay its invoices on time or at all, Sam decides to utilize the cost recovery method of accounting. This ensures that the company will not overstate its net income in any given year, as it won’t record any of the incremental profits that it may or may not realize until Gilbert pays its full bill.
In addition to ensuring that companies recognize their net income properly, the use of the cost recovery method can reduce the amount of taxes they must pay in any given year. This is because accountants are able to use the depreciation tax law to lower the taxes a business must pay on its equipment as it loses value over time. In contrast, companies that do not use the cost recovery method must pay taxes on all of their profits in the year in which they are realized.
Departments should process all internal sales and recovery transactions using the appropriate funding source, auxiliary project code, and a fiscal period that will cover the expected delivery of goods or services. Transactions that are recorded in a non-fiscal year should be accrued, but this is not required in most cases.
For more information about establishing the rate at which you will charge for your goods or services, contact your accounting officer, who can help you set up the rates and billing processes that work best for your organization. The University’s accounting officers are available to assist with this, and they will review your policies and procedures regularly to ensure that you are implementing a successful cost recovery program. They will also provide support and guidance in developing budgets that are consistent with your program’s land grant mission.