Understanding Cost in Excess of Billings: A Key Financial Concept
Definition & meaning
Cost in excess of billings refers to a situation in accounting where the costs incurred on uncompleted contracts exceed the amount billed to clients. This typically occurs in projects using the percentage of completion method, where income is recognized based on the progress of the work. When costs exceed billings, it results in an asset on the balance sheet, indicating that the company has incurred expenses that have not yet been recovered through billing. Conversely, if billings exceed the costs incurred, it creates a liability known as billings in excess of costs.
Legal use & context
This term is commonly used in construction and contract law, particularly in relation to accounting for long-term contracts. It is crucial for businesses to accurately report their financial position, especially when seeking financing or negotiating contracts. Users may find it beneficial to utilize legal forms and templates from US Legal Forms to ensure compliance with accounting standards and legal requirements.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A construction company has spent $200,000 on a project but has only billed the client $150,000. The company would report a cost in excess of billings of $50,000 as an asset.
Example 2: A contractor completes a project and bills the client $300,000, but the costs incurred total only $250,000. In this case, the contractor would report billings in excess of costs as a liability of $50,000.