I am a bookkeeper with an accounting question. How do I record year end adjusting entries for costs in excess of billings and billings in excess of costs? By our WIP. schedule, we should have $26,731 in the liability account Billings in Excess of Costs and $166,271 in the asset account Costs in Excess of Billings (our schedule is comprehensive and takes into consideration earned revenue and estimated costs to complete.) These are new accounts for us in our accounting program and I am not familiar with making this type of entry. Can you assist me with the year ending journal entry for these accounts so that they post correctly in sales?

ANSWER

The BIDaWIZ Team's Answer:

What accounting program are you using? We assume you're utilizing the percentage of completion method to account for the contracts? Please confirm.
Generally speaking, the adjusting journal entry must be prepared to adjust the revenue recognized on jobs that are in progress based upon the estimated percentage of job completion as of year end. That journal entry is reversed on the first day of the next reporting period.

Please note that the following items need to be pulled from your job-cost records, which you appear to have readily available.

Cost to date - total costs incurred on the job from inception through the end of the accounting period. Billings to date - total billings taken on the job from inception through the end of the accounting period. Current contract - original contract plus change orders executed through the end of the accounting period. Total estimated costs - current estimate of total anticipated costs on the job. This estimate should be updated to account for any projected budget over-runs or under-runs as well as include estimated costs on all change orders included within the current contract amount.

After obtaining that information, the following adjusting entries would be recorded by: The amount of revenue to be recognized for the period is computed by multiplying the completion percentage (determined by whatever method is appropriate for the contract) by the current contract amount. The completion percentage is computed by dividing total estimated costs by costs to date.

The revenue to be recognized for the period is subtracted from the revenue posted to the job-revenue account (billings to date). This difference is posted to either Billings in Excess of Costs or Costs in Excess of Billings. When billings exceed revenue you would record the following entry:

Dr. Sales (Revenue)
Cr. Billings in Excess of Cost

When revenue recognized exceeds billing you would record the following entry:

Dr. Costs in Excess of Billings
Cr. Sales (Revenue)

References: IRC Section 460
State: Washington