Over-Under Billings at a Glance
In the past, Remodeling has featured articles on the three basic types of accounting methods:
1. Cash Basis – where accounts receivable and payable only show up on the financial statement when client payments come in or a payable check is cut.
2. Accrual – where a receivable invoice or a payable bill appears on the financial statement as soon as it is entered into your system.
3. Percentage of Completion – the accrual basis method that takes into account project bills yet to be received and outstanding monies yet to be invoiced to the client.
Cash basis is the least accurate, and while accrual is a good method, the over/under billings can really fluctuate your numbers; these need to be analyzed on a monthly basis. To operate with a clear and realistic picture of your business you will need to use the percentage of completion accounting method. This will mean tracking the over-under billings for your current period of operation.
What in the world are over-under billings?
Simply put, if your company has completed 25% of a remodeling project, but you have invoiced 50% of the contract amount, you are 25% over-billed. Likewise, if your company has completed 50% of a project but you have only billed 25% of the contract amount, then you are 25% under-billed. This can flesh out in either an overinflated or underinflated monthly income statement.
If your income statement reflects too much profit you might be inclined to buy that shiny new work truck you’ve had your eye on. Then -- surprise -- the next month bills trickle in on your projects and you discover you really did not have the disposable cash you thought you did.
How do you track over-under billings?
If you need to manually calculate the over-under billings, you can do this on an Excel spreadsheet. See the example below:
||% of Budget
You should invoice the same percentage of the contract as the percentage of the budget you have spent. The difference between those two is your over-under amount. Once you know the amount, you will need to adjust your financials. You do this by making a simple journal entry:
For over-billing (a negative amount):
Debit “Over-Under Billings” (set up as an income account) and credit “Over-billings” (set up as a current liability account).
For under-billing (a positive amount):
Debit “Under-billings” (set up as a current asset account) and credit “Over-Under Billings: (same income account you debit for an overbilling).
Be sure to reverse this entry in the next period (month). You must start over every month; you cannot be both 25% and 50% complete on the same project.
Relax – it’s not that difficult. Enjoy tracking over-under billings and let me know when you can finally buy that truck.
For a more detailed look at percentage of completion accounting The Remodeler’s Guide to Making & Managing Money by Linda Case is very helpful.