Chart of Accounts & Categorization
COGS vs Operating Expenses: Why Trades Owners Mix Them Up
Short answer
COGS = expenses you wouldn't have if the job didn't happen (materials, subcontractor labor, job-site supplies). Operating expenses = overhead you'd pay even with zero jobs (rent, software, marketing, insurance). Mixing them hides your real margin and breaks your pricing.
If your P&L shows one big 'Expenses' line, you can't see whether you're underpricing jobs or overspending on overhead. Splitting COGS out is the single biggest upgrade most service businesses can make to their books.
Why this matters for pricing
Revenue − COGS = Gross Profit. Divide by revenue for Gross Margin. Healthy trades target 35–50% gross margin.
If you don't separate COGS, you'll think a job that grossed $10K and cost $7K in materials/subs is wildly profitable — when it's actually razor-thin once overhead is allocated.
Quick test
- Would I still spend this dollar if I had zero jobs this month? Yes → Operating Expense. No → COGS.
- Is this cost variable with job volume? Yes → likely COGS.
- Is the cost on the customer's invoice as a passthrough? Almost always COGS.
Frequently asked questions
Where does my own labor go?
If you're a sole prop taking owner's draws, your labor isn't an expense — it's profit. If you pay yourself W-2 wages from an S-Corp, that wage is COGS (if billable) or Operating Expense (if admin).
Bookkeeping, done for you.
Glo Invoice keeps your P&L, AR, and expenses in sync automatically — no spreadsheets, no surprises.
Sources & further reading
Primary sources we consulted when writing and reviewing this guide.