Which bills exceed costs?

"Cost overbilling" is a term used in financial accounting to refer to situations where the amount billed to the customer exceeds the revenue actually earned. Until these revenues are earned, they are recorded as a liability in the company's accounting books. This type of overbilling situation usually occurs in industries where advance billing for services is common, such as construction.

One of the most common examples of how this term is used is found in the billing process used by many contractors. In this scenario, it is not uncommon for a contractor to pre-charge clients for work that has been contracted but not yet performed. The understanding is that the work will be completed within a reasonable period of time. In the meantime, billed receivables will be greater than actual revenue earned and will be recorded as a liability in the contractor's financial records. As the work is completed and the income is considered earned, the value decreases until the value is no longer classified as a liability.

Suppliers sometimes use cost overpricing as a way to control expenses and avoid having to use credit or borrow to prepay needed materials. By securing some advance payments from clients, these funds can be used to cover all costs associated with the work as there is money available to pay for labour, materials or any other tasks relevant to the completion of the work. When managed well, this means that once the project is complete, there are no outstanding costs to be delayed and the supplier has on hand any profit generated beyond the cost of the work.

While this practice is accepted in many industries, this approach creates the need to carefully manage the billing associated with each customer in ways that would not be necessary if billing was done at the time the money was earned. Care must be taken to track the progress of work or service delivery so that liability is accurately reduced. Also, if the supplier has several different projects running concurrently, they should avoid using the transferred funds as a liability to purchase supplies for one job when, in fact, the revenue is associated with a different job. Failure to do so can quickly create a false image of what was and was not charged for a particular job, leading to problems for both the customer and the supplier.

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