When expenditure is incurred on a project but the customer has not yet been billed, the situation is referred to as “Costs in Excess of Billings” or “Unbilled Revenue.” This situation usually occurs in long-term contracts or projects when costs are recorded before the corresponding billing is issued.
Here’s the more important journal entry for costs in excess of billings:
Journal Entry for Costs in Excess of Billings
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Costs in Excess of Billings (Asset) A/c Debit | X, XXX | |
| 09/06/2024 | To Costs (Expense or Inventory) A/c | X, XXX |
Explanation:
- Costs in Excess of Billings (Asset): This account will be debited to represent expenses have been incurred but not yet billed to the customer. It is treated as an asset on the balance sheet.
- Costs (Expense or Inventory): This account (depending on the type of project) will be credited to reflect actual costs.
The Costs in Excess of Billings The account will remain until an invoice is issued, at which time it will be transferred to Accounts Receivable or another relevant account.
Example Journal Entry
Assume a company incurred $10,000 in costs for a construction project but has not yet billed the client.
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Costs in Excess of Billings (Asset) A/c Debit | 10,000 | |
| 09/06/2024 | To Construction Costs (Expense) A/c | 10,000 |
Explanation:
- The company records $10,000 in Costs in Excess of Billings to recognize he has incurred costs related to the project but has not yet billed the customer.
- The Construction Costs an account will be credited to recognize the expenditure already incurred on the project.
Adjusting Journal Entry (When the Project is Billed)
When the company eventually bills the client, the entry to record the billing will be:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Accounts Receivable A/c Debit | 10,000 | |
| 09/06/2024 | To Costs in Excess of Billings (Asset) A/c | 10,000 |
Explanation:
- Accounts Receivable will debited to record the amount billed to the customer.
- Costs in Excess of Billings (Asset) will credited to remove the asset since the costs have now been billed.
This process ensures costs properly match revenues under the percentage-of-completion method or other long-term project accounting methods.