Billings in Excess of Costs: 2026 Guide for Contractors

Construction business owners across Moreno Valley, Riverside, and the broader Inland Empire see billings in excess of costs on lender-ready financials and often wonder what the line item says about their business. Written by Adham Abadier, CPA — Licensed in California, License #158599 (QuickBooks Gold ProAdvisor, AICPA and CalCPA member), this guide covers where the account comes from, the journal entries behind it, how GAAP and the IRS treat it differently, and the year-end procedures that keep it clean. If you want a professional review of your contract schedules, our CPA services include construction accounting support for contractors across Riverside and San Bernardino counties.

Billings in excess of costs is a current liability on a contractor’s balance sheet that appears when the amount billed to a customer runs ahead of the revenue recognized under the percentage of completion method. The IRS’s Construction Industry Audit Technique Guide names the account “Billings in Excess of Costs and Estimated Earnings,” classifies it as a liability, and treats it as the balance-sheet home for the gap between invoicing and work performed.

This guide explains the balance-sheet meaning and book-versus-tax distinction. For the practical entry and month-end workflow, see our contractor journal-entry and WIP reconciliation guide.

Key Takeaways

What Billings in Excess of Costs Means on Your Balance Sheet

Credit-training firm Shockproof! defines the account precisely: the amount of invoice to a client that exceeds the actual work performed under a specific contract using the percentage of completion method. The company increases accounts receivable by the full invoice amount and increases revenue only by the value of work completed — so when the invoice runs higher, the difference is recorded as billings in excess of cost and profit, reflecting an obligation to deliver, or complete, a specific amount of product in the future.

Public-company filings describe the same mechanics. One SEC filing states: “The current liability, ‘Billings in excess of costs and estimated earnings on uncompleted contracts,’ represents billings in excess of revenues recognized” (SEC filing).

Conceptually, Shockproof! compares the account to customer deposits and deferred revenue or deferred income: money billed for work that has not yet been performed.

The account is not hypothetical. In the IRS guide’s sample balance sheet for a hypothetical contractor, “Billings in Excess of Costs and Estimated Earnings” appears among current liabilities at $5,666, where it reconciles to the guide’s Schedule 3 – Contracts in Progress exhibit (IRS Construction Industry Audit Technique Guide).

The Mirror Account: Costs and Estimated Earnings in Excess of Billings

When work performed runs ahead of invoicing, the difference lands in Costs and Estimated Earnings in Excess of Billings — an asset that Shockproof! says is also referred to as unbilled receivables or unbilled work in progress. The IRS guide explains why both accounts exist: because the percentage-of-completion computation is a calculation rather than a day-to-day bookkeeping entry, contractors create two balance sheet accounts to track the difference between the method and their billings.

Why the Account Exists: Percentage of Completion Mechanics

Under the percentage of completion method, the revenue a contractor recognizes each period depends on a computation — costs incurred divided by total estimated costs. The IRS’s Audit Technique Guide stresses that this computation is not made through day-to-day book recording procedures: there is no general ledger account for total estimated contract costs. Invoices, meanwhile, follow the contract’s billing schedule, so the two figures rarely match while a job is open. The guide illustrates the setup with a long-term contract carrying a total estimated contract price of $3,000,000 against total estimated contract costs of $2,000,000.

Journal Entries in Action: Billings in Excess of Costs

Shockproof!’s worked example shows the entry a contractor records when it issues a $25,000 invoice for $20,000 of completed work:

• Debit: Accounts Receivable — $25,000
• Credit: Revenue (cost and profits) — $20,000
• Credit: Billings in Excess of Cost and Profits — $5,000 (Shockproof! Expert Q&A)

The reverse situation works the other way: recognizing $25,000 of revenue against $20,000 of invoices produces a $20,000 debit to Accounts Receivable, a $5,000 debit to Cost and Profits in Excess of Billings, and a $25,000 credit to Revenue.

Invoicing ahead of the work but your job-cost reports and balance sheet never quite tie? Adham will personally review your contract schedules, the two accounts they feed, and your year-end true-up — then show you where the drift started and how to fix it before lenders ask.
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GAAP vs. Tax: Why the Same Account Means Different Things

The balance-sheet label is not a tax rule. Section 460 generally requires percentage-of-completion treatment for long-term contracts, with exceptions for certain construction contracts. Identify the applicable method before determining tax revenue and deductions; see IRS guidance on section 460.

Item	GAAP financial statements	IRS tax regulations
Billings in excess of costs	Balance sheet liability	Tax timing depends on the applicable contract accounting method
Costs in excess of billings	Balance sheet asset	Deductibility and timing depend on the applicable tax rules; the asset balance is not automatically a deduction

That divergence matters whenever a lender, surety, or buyer compares GAAP statements to a tax return. The same Q&A adds a caution: the methodology assumes a “going concern” situation, and in a liquidation or workout the value of both accounts might be questioned — though, as it notes, so would many other assets on the balance sheet.

Year-End Procedures: How Billings in Excess of Costs Gets Trued Up

The IRS guide prescribes a contract-by-contract process at year-end (IRS Publication 5522):

1. For each contract in progress at year-end, take the total cost incurred to date plus the estimated earnings (on the percentage of completion method) and reduce it by the total amount of bills rendered to arrive at a net balance — a debit if total costs and estimated earnings exceed billings, a credit if billings exceed them.
2. Add together all contracts with a debit balance and show the total as an asset on the balance sheet.
3. Report contracts showing a credit balance in the liability account, Billings in Excess of Costs and Estimated Earnings.

Two rules complete the picture. First, the guide states the two accounts should not be netted or offset against each other — both should be present on the balance sheet. Second, the sample financials show the liability account reconciling to the Schedule 3 – Contracts in Progress exhibit, which is the standard your own contract schedules should be able to meet.

What the Balance Tells Lenders, Sureties, and You

If your company runs several jobs at once, it is very common — in Shockproof!’s words — to see both accounts at the same time, because different projects sit at different billing stages. A contractor working a single job shows one account or the other, never both. As jobs come to completion, both accounts are eliminated.

Direction matters for cash flow. From a contractor’s viewpoint, Shockproof! notes, billing in excess of cost and profits is strongly preferred: when the client pays the invoice, the payment provides cash to pay for the project as it unfolds. The flip side — costs and profits in excess of billings — represents work performed and profits recognized that have not yet been billed.

For contractors from Ontario to Temecula, that makes the account a working-capital signal as much as an accounting one. Keeping it accurate takes disciplined job-level entries; where a QuickBooks file has drifted, catch-up bookkeeping can restore the detail these balances depend on. The schedules themselves are the output of a broader job costing services workflow, and ongoing construction bookkeeping support keeps them current month after month.

Frequently Asked Questions

What is billings in excess of costs?

It is the current liability that records the amount billed to a client above the actual work performed under a specific contract on the percentage of completion method. The IRS’s construction audit guide names the account “Billings in Excess of Costs and Estimated Earnings,” and an SEC filing describes it as billings in excess of revenues recognized on uncompleted contracts.

Is billings in excess of costs an asset or a liability?

On GAAP financial statements it is a liability. The mirror account — Costs and Estimated Earnings in Excess of Billings — is an asset, and the IRS guide says the two should appear on the balance sheet without being netted or offset against each other.

How is billings in excess of costs calculated?

At year-end, for each contract in progress, total cost incurred to date plus estimated earnings is reduced by the total bills rendered; a credit net balance means billings exceed costs and estimated earnings. The percentage-of-completion computation itself is not made through day-to-day book recording — no general ledger account exists for total estimated contract costs.

How does the IRS treat billings in excess of costs?

Neither the liability nor the asset label alone answers the tax question. Apply the permissible method for the contract and reconcile book and tax amounts; IRS guidance on section 460 explains the general rule and construction-contract exceptions.

Can a contractor show both accounts at the same time?

Yes. When several jobs are underway, it is very common to see both, because different projects sit at different billing stages. A contractor working a single job shows one account or the other — never both.

What happens to the account when a job is completed?

As jobs come to completion, both billings in excess of costs and profits and costs and profits in excess of billings are eliminated. The balances exist only while work is in progress.

Is billings in excess of costs the same as deferred revenue?

They are similar in concept. Shockproof! compares the account to customer deposits and deferred revenue or deferred income — money billed against an obligation to deliver, or complete, a specific amount of work in the future.

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Get Your Contract Accounting Right Before December 31

Billings in excess of costs is not a mistake — it is a normal feature of percentage-of-completion accounting, and with the right schedules it becomes a clean, defensible number that lenders and sureties understand. For lender and surety packages, CPA-prepared financial statements give those schedules a professional, review-ready wrapper. The risks come from drift: estimates that never get updated, job files that do not reconcile, and tax positions that quietly diverge from the books.

Catalyst CPA Corporation works with contractors and business owners in Moreno Valley, Riverside, Corona, Temecula, and throughout the Inland Empire — and remotely nationwide. Whether you need a CPA team that understands construction accounting or help organizing your year-end contract records, call (951) 223-1826 or book your free 30-minute call today.

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