UNDER BILLING AND OVER BILLING IN CONSTRUCTION BUSINESS

Under biling and over billing are terms which are popularly used in construction business. Revenue recognition is the base for this under billing and over billing calculation.

Some of the details of Over billing and under billing and it’s Accounting t treatment  are as follows

OVER BILLING

Over billing means billing of the revenue more than that of the revenue  actually earned( from % of completion method) . In construction business , percentage of completion method used for  identify and recognise the revenue for a particular period.

Due to over billing, customers  or client need to pay more cash to contractor(excess billed portion) so contractor get more money and it help to create more liquidity.  

ACCOUNTING TREATEMENT  -  OVER BILLING

For  Eg.  In the case of Project A, monthly billed amount  AED 200,000/- and the actual revenue recognized is  Aed  170,000/- Accounting treatment is as follows-:

1) WHEN RAISING MONTHLY BILLING

PARTY  A/C                                                       DR                    200,000

TO  CONTRACT REVINUE                                                                     200,000

2)WHEN  RECOGNISING REVENUE UNDER PERCENTAGE OF COMPLETION METHOD AND BVALANCE TRANSEFERRED TO EXCESS BILLING A/C

CONTRACT REVENUE A/C                              DR                        30,000

                                                   TO    EXCESS BILLING A/C                                      30,000

 DISCLOSURE OF FINANCIAL STATEMENT

1)Recognised  Revenue for that period showing  as ‘’Contract Revenue ‘’ in P&L A/c.

2)Party A/c  showing as ‘’Debtors’’ under ‘’current asset’’.

3)’’Excess billing’’ amount showing as liability under the head ‘’current Liability’’.

ASSUMPTIONS OF OVER  BILLLING

1)Non booking of cost or less booking of cost will result in to Over billing .

2)Due to over billing, contractor getting more than that of cash which they deserved from the client.

UNDER BILLING

Under billing means billing of the revenue less than that of the revenue actually earned( from % of completion method) . In construction business , percentage of completion method used for  identify and recognise the revenue for a particular period.

Due to under billing, customers  or client only  pay less cash to contractor(less  billed portion) so contractor only get less money than that of deserved.  

ACCOUNTING TREATEMENT  -  UNDER BILLING

For  Eg.  In the case of Project A, monthly billed amount  AED 170,000/- and the actual revenue recognized is  Aed  200,000/- Accounting treatment is as follows-:

1)WHEN RAISING MONTHLY BILLING

PARTY  A/C                                                       DR                    170000

TO  CONTRACT REVINUE                                                                     170000

2)WHEN  RECOGNISING REVENUE UNDER PERCENTAGE OF COMPLETION METHOD AND BVALANCE TRANSEFERRED TO EXCESS BILLING A/C

WORK IN PROGRESS                  DR                        30,000

                                    TO    CONTRACT  REVENUE                                    30,000

DISCLOSURE OF FINANCIAL STATEMENT

1)Recognised  Revenue for that period showing  as ‘’Contract Revenue ‘’ in P&L A/c.

2)Party A/c  showing as ‘’Debtors’’ under ‘’Current asset’’.

3)’Less billing’’ amount showing as Work in progress (WIP)  under the head ‘’current Aset’’.

ASSUMPTIONS OF UNDER  BILLLING

1)Excess booking of cost or variantion work but not certified by client of consultant will result in to underbilling .

2)due to under billing, contractor getting  only less cash  than that  they deserved from the client.