Utah Contractor Practice Exam

What category does Workman's comp expense fall under?

1. Assets

2. Labor costs

3. Revenue

4. Profit

The correct answer is: Labor costs

Workman's compensation expense falls under labor costs because it is a cost associated with the employment of workers and directly pertains to the protection of employees in case of work-related injuries or illnesses. This expense is a necessary part of payroll-related costs, reflecting the employer's obligation to provide a safe working environment and cover the financial risks involved with potential worker injuries. Treating workman’s comp as a labor cost aligns with accounting principles, as it is linked to the cost of employing workers, rather than an asset, revenue, or profit. In this context, categorizing it as an asset would imply that it has value that can be utilized in the future, which does not apply to insurance expenses like this one. Revenue refers to income generated from business activities and is not directly related to labor costs. Profit illustrates the difference between total revenue and total expenses, but workman’s compensation expense is part of the expense side of the equation, not profit itself. Therefore, recognizing it as a labor cost is the most appropriate categorization.