What Are Billings in Excess of Costs in Accounting?
Understand how timing differences in long-term contracts can result in a contract liability when billings exceed the value of work performed.
In industries with long-term projects, such as construction or defense contracting, billing practices do not always align with the progress of work. A company may issue invoices to a client on a predetermined schedule, which can result in billing for more than the value of the work completed at that time. This situation creates an accounting entry known as “billings in excess of costs,” reflecting an advance payment from a client for future work.
This scenario is a normal part of project-based accounting where cash receipts are disconnected from revenue recognition. For example, a contract might specify a large upfront payment before significant work has begun. This payment creates a liability for the company, as it now has an obligation to perform the services or provide the goods it has been paid for.
The Concept of Contract Assets and Liabilities
The timing mismatch in long-term contracts is addressed by the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Topic 606. This guidance addresses discrepancies between when work is performed and when a customer is billed, resulting in either a contract asset or a contract liability.
A contract liability is created when a company receives payment from a customer before the revenue is earned. “Billings in excess of costs and estimated earnings” is the term for this liability, representing the company’s obligation to provide future goods or services. It is essentially unearned revenue.
Conversely, a contract asset occurs when a company incurs costs and recognizes revenue on a project before it has the right to bill the client. This asset, termed “costs in excess of billings,” represents the value of work performed that has not yet been invoiced. Both contract assets and liabilities are temporary and fluctuate over the life of a project.
Calculating Billings in Excess of Costs
The calculation of billings in excess of costs is tied to recognizing revenue over time, which allows for the gradual recognition of profit during a long-term contract. The calculation requires tracking cumulative figures for costs, recognized revenue, and billings on a contract.
Consider a three-year construction project with a total contract price of $5 million and an estimated cost of $4 million. At the end of the first year, the company has incurred $1.2 million in costs. To calculate the revenue earned, the company determines its progress.
Using a cost-based input method, the percentage of completion is calculated as costs incurred to date ($1.2 million) divided by the total estimated costs ($4 million), which equals 30%.
The company then calculates the revenue it can recognize by multiplying the 30% completion by the $5 million contract price, resulting in $1.5 million of recognized revenue. The profit recognized is the difference between the recognized revenue ($1.5 million) and the costs incurred ($1.2 million), which is $300,000.
The final step compares the recognized value against what has been billed. If the company has billed the client $2 million, the “billings in excess of costs” is calculated by taking the amount billed ($2 million) and subtracting the cumulative costs incurred plus the cumulative profit recognized ($1.2 million + $300,000 = $1.5 million). The result is $500,000.
Financial Statement Presentation
The “billings in excess of costs” figure is reported on the balance sheet as a contract liability, typically classified as a current liability. This reflects the company’s obligation to perform the related services within the next operating cycle. This liability signifies that the company has received payment ahead of performance.
This balance sheet entry is directly linked to the income statement. As the company performs more work in subsequent periods, it will recognize more revenue. This act of recognizing revenue “earns” a portion of the advance payment. As revenue is recognized, the contract liability is reduced until the project is complete and the liability account for that contract is zeroed out.
Under ASC 606, companies must present contract assets and contract liabilities on a net basis for each individual contract. It is common to net all contracts that are in a liability position and present a single “contract liabilities” line item on the balance sheet, with footnote disclosures providing additional detail.