Progress billings
| Progress billings |
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| See also |
Progress billings are type of invoices that are used in projects that need longer time and high investments, e.g. in construction business as a part of Percentage of completion (PoC) accounting method of evaluating of progress in the project. The customer receives invoices, that he has to pay, in predefined stages of the project, e.g. after each phase. The progress billings show how much work has been done. Usually progress billings cover less than 100% of payments, e.g. 20%. In case of additional costs in the project, the contract has to be updated and since then progress billings can be increased. The progress billings are calculated on accumulative-to-date basis[1]. Progress billings represent a function of project completion (in percentage) multiplied by the contract sales price.
The amount of tehse billings are often specified in the contract agreement[2]. The final invoice is received by the customer after the project has been finished. Progress billings are a contra-asset account and can be used interchangeably with the terms like:
- Billings on long-term contracts
- Billings on construction contracts
What differs progress billings form the other type of invoices is:
- The adjusted total contract amount
- The cumulative amount of progress billings to date
- The percentage of completion of the project
- The total amount remaining to be billed
Progress billings application
Progress billings are most commonly used in constructions projects, but it is not the only industry that takes advantage from that billing method. It has also a great value for industries like aerospace, defence or some scientific development projects. Such projects usually have enormous budgets and could take years to complete. These type of invoices are also willingly used by many labor workers like:
- Roofers
- Plumbers
- Painters
- Electricians
- Gardeners
The main reasons of using progress billings in these projects are cost of raw material, labor and potential delays. In some construction project, few percents of the sum are kept by the customer to secure guarantee (e.g. total billings are for 95% of investment and final 5% is paid 1-2 years later)
Progress billings on accounts
Progress billing amounts should be debited to Accounts Receivable and credited to deferred account Progress Billings on Construction Contracts which acts as an offset to the inventory account - Construction in Progress[3]. Progress billing on Construction Contracts is offset against the construction in progress account. The excess of the billings exceeding the construction costs would be reported in the Current Liability section in the balance sheet[4].
Footnotes
References
- Bodnar, G. H., Hopwood, W. S. (2001) Accounting Information Systems
- Chaudhry A., and others (2015) Wiley IFRS 2015: Interpretation and Application of International Financial Reporting Stnandards John Wiley & Sons
- Prather L., (2017) Financial Accounting and Reporting Study Guide Notes AuthorHouse
- Stice E. K., Stice J., D. (2013) Intermediate Accounting South-Western
- Whittington O. R., (2009) Wiley CPA Examination Review, Outlines and Study Guides, Volume 1 John Wiley & Sons
Author: Arkadiusz Liszka
