A back charge is a bill sent for an expense that occurred at a previous time. Some of the reasons why such a charge may occur include collecting payment on a good/service that wasn’t paid before or correction of a bill that included an incorrect expense.
Back charges should be avoided whenever possible because it’s often difficult for companies to collect them. Customers get a bill and aren’t expecting additional charges or corrections for charges. In cases where the customer didn’t pay the full amount, they are often unable or unwilling to settle the additional charges, and the charges can end up being pushed to a collection agency.
Who Can the Charge?
The charge is received by a customer, which can be an individual or company. The charges are most often referenced when talking about the dynamics between a vendor and the company it supplies. In such cases, both are companies. The vendor supplies a company with goods and provides a bill.
The speedier and more accurate the bill, the better. Back charges – especially when the vendor charges additional fees – can come as a shock to the company, unless it knows it didn’t pay the full amount to begin with. In such cases, the vendor may also include a sort of interest charge, an additional fee for having to seek out full payment for the goods they have supplied.
Significance of a Back Charge
Back charges are usually listed as accounts receivable when the company is owed money or as an accounts payable when the company owes money. In order to maintain accurate balance sheets, companies need to know if their accounts are increasing or decreasing. They expect to get paid for the goods and services they provide, which enables them to pay their own bills. If back charges occur – for whatever reason – it means either money is owed to a customer or that they should be receiving money from a customer.
When customers can’t or won’t pay or when the company, in error, ends up owing the customer money, it throws off their accounts payable and receivable. Significant changes to one account, the other, or both can provide helpful insight:
About the need for/frequency of back charges
How likely the company is to make payments/receive payments
How capable the company is of paying off its own debts
For example, let’s say that a vendor sells a gas station sells $1,200 worth of supplies each month. If the store fails to pay for one month of their supplies, the vendor will send a new invoice for $2,400: the fee for the forgotten month and the next month.
Because the gas station missed a month’s payment – which they should be aware of – the vendor may add a penalty fee for having to send an additional bill. It can be a percentage of the $1,200 charge or the vendor may impose a flat fee for the missed payment.
For every business, getting paid for the products and services they provide is critical. In the event that they are owed money, they may send a back charge during the next billing period in order to bring in what they are owed.
They may also issue a back charge if they owe the customer money – either because of an accounting error or a change in prices. Ultimately, such charges should be avoided because they are notoriously hard to collect in a timely way.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes.
These courses will give the confidence you need to perform world-class financial analyst work. Start now!
Building confidence in your accounting skills is easy with CFI courses! Enroll now for FREE to start advancing your career!