Pass-Through Expense

What is a pass-through expense?

A pass-through expense is a cost incurred on behalf of a client and billed back without markup. Travel expenses, filing fees, and third-party services are common examples. Pass-through expenses are distinguished from reimbursable expenses where a markup may apply. They flow through your books as both an expense and a corresponding revenue or receivable offset.

Accounting for pass-through expenses

Two approaches exist. The gross method records the expense and a separate revenue line when billing. Net method records only the receivable with no revenue or expense recognition. Gross inflates revenue and expenses equally with no profit impact. Net keeps financials cleaner. Choose based on how you want these items to appear in your financial statements and client reports.

Managing client expectations

Define pass-through treatment in your engagement letter. Specify what qualifies, whether markup applies, and how expenses will be documented. Provide receipts or detailed support with invoices. Surprises about expense billing damage client relationships. Clear upfront communication about pass-through practices prevents disputes when invoices arrive.