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What Are Billings in Excess of Costs?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 20 August 2014
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    Conjecture Corporation
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"Billings in excess of costs" is a term used in financial accounting to refer to situations in which the amount invoiced to the customer exceeds the revenues that have actually been earned. Until those revenues are earned, they are carried as liabilities on the company’s accounting books. This type of overbilling situation usually occurs in industries where it is common to bill for services in advance, such as in construction.

One of the most common examples of how this term is used is found with the billing process used by many contractors. In this scenario, it is not unusual for a contractor to bill clients in advance for work that is contracted but has not yet been done. The understanding is that the work will be completed within a reasonable period of time. In the interim, the accounts receivable billed will be more than the actual revenues earned, and carried as a liability in the contractor’s financial records. As the work is finished and the revenues are considered earned, the amount decreases until the amount is no longer classed as a liability.

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Providers sometimes use billings in excess of costs as a means of controlling expenses and avoiding the necessity of using credit or taking out loans in order to pay for materials needed up front. By securing some advance payments from customers, those funds can be used to cover all costs associated with the work, since the cash is in hand to pay for labor, materials, or any other task relevant to completing the job. When properly managed, this means that, once the project is complete, there are no lingering costs to be settled and the provider has in hand any profit that is generated above and beyond the job expenses.

While this practice is accepted in a number of industries, this approach does create the need to carefully manage the billing associated with each client in ways that would not be necessary if the billing took place at the time the money was actually earned. Care must be taken to track the progress of the work or the delivery of services so that the liability is accurately reduced. In addition, should the provider have several different projects taking place concurrently, it must avoid using funds carried as a liability to buy supplies for one job when in fact that revenue is associated with a different job. Failure to do so can quickly create a false image of what work has and has not been billed with a given job, creating issues for both the client and the provider.

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Logicfest
Post 1

It looks like a nasty accounting trick at first blush, but it actually makes a lot of sense. Until a job is complete, the revenue collected for it can be considered a liability -- costs will have to come out of it, the client might not be satisfied and demand a refund, etc.

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