Underbillings are costs incurred on a project that were not billed at the end of the month. True False
The correct answer and explanation is:
The correct answer is True.
Underbillings refer to the situation in project accounting where the costs incurred on a project exceed the amounts billed to the client by the end of the accounting period, such as the end of the month. In other words, it happens when a company has performed work and incurred expenses but has not yet invoiced the client for those costs. This creates a timing difference between the recognition of costs and the billing of revenue.
In project-based industries like construction, engineering, or consulting, projects often span several months. Companies track costs and bill clients periodically. If the work done and costs incurred are greater than the amount billed, the difference is called underbilling. This indicates that the company has effectively “financed” the project by covering more costs than it has been paid for. Underbilling can affect cash flow negatively because money is tied up in the project without being collected.
Underbillings are usually recorded as an asset on the balance sheet under “costs and estimated earnings in excess of billings” or a similar account. This represents the value of work completed but not yet invoiced. It is important to monitor underbilling because persistent underbilling may indicate billing delays or contract issues. Over time, underbillings should reverse as the company bills the client and collects payment.
In contrast, overbilling occurs when the amount billed to the client exceeds the costs incurred. This is recorded as a liability because the company has collected more money than the value of work done so far.
Understanding underbilling helps companies manage project profitability and cash flow. It also ensures financial statements reflect accurate revenue and cost matching during long-term projects. Therefore, the statement that underbillings are costs incurred on a project but not billed at the end of the month is correct.