Are server costs & domain reg cost of sale or expenses

Hi, could anyone advise me as to whether the following come under cost of sale or expenses. We develop and host websites for some of our clients. As such we register domains for them and pay the annual registration fee to maintain these domains. This cost is then passed on to the client in our annual management fees. As we host quite a few sites we hire dedicated servers in the US to place our sites on. These servers site our own websites as well as our clients. Where do I account for these costs, cost of sale or expenses. Does it make much of a difference? Thanks.

Are they a cost only by virtue of the sale i.e. directly attributable to the sales. If so, they are a cost of sales. Expenses are fixed and variable costs of the business that are not directly related to the sale eg rent, rates, etc. But a portion of some of the expenses may also be cost of sales eg office Electricity = expenses while sale related electricity = cost of sales. Its a judgement call. The main thing is that your gross margin makes sense to Revenue inspection and that you don't over complicate it.

I think you also need to consider capitalising (either a fixed asset or current asset) some of the cost which can lead to future sales. This would enable you to match the sale and related expense rather than expensing it all now.

Hope that makes sense and that you can implement it to your business.

Thanks Paddy199. I am thinking that I may just put them all through as expenses as it is a fine line in some areas as to which is cost of sale or expenses. I think I would be guilty of over complicating it as you said.
Your advise about treating a cost such as the server hire as a fixed asset is interesting. I did not think about treating the hire of servers in this way. Would depreciation be allowed in this situation?

Personally, I think they are more cost of sales than expenses. If you had no sales, you could stop hiring these servers in the morning.

No you can't capitalise something to fixed assets unless you own it. I would expense it rather than treating it as a prepayment because the hire of the servers sounds like a monthly arrangement in your case. I was referring to something that might be more long term and you maybe pay for it upfront for a period of time thats longer than your financial period i.e. pay on 1 Dec for 12 months when your year end is 31 Dec. You have a prepayment asset in this case of 11 months of the expense.