Unbilled time (Billable time - movement) and accrued income

I generally recognize services revenue when my services are invoiced to the client, which usually happens monthly according to my contracts. That is, I generally don’t recognize services work in progress as income (what Manager calls Billable time - movement until I invoice the service and it is debited to Accounts receivable.

Manager considers Billable time - movement (WIP) to be an income account, so the balance in that account is included in Net Income at the end of the financial period.

Is there a way to have Manager not recognize income on my contract hours until they are invoiced to the customer? Ideally, I would like to have an option to reclassify the Billable time - movement (WIP) account to be a contra-asset, if that is more in keeping with my business’s revenue-recognition practices. The wonderful Billable time feature is hard-coded to that account, and the only options under the Chart of Accounts settings for that account are Income and Expenses.

Or am I going about this wrong?

There are two way to go about this. First is to generate your P&L on cash-basis where billable time is not present.

Or, you can organize your Chart of Accounts and put Billable time - movement to the very end of the profit & loss statement and have a total separating billable time - movement from the rest of the accounts.

For example, you could create a total called Net profit (loss) before work in progress and have it before billable time movement account.

This is a very strange way to treat a work-in-progress item. Ever since accounting was first carved onto stone tablets, work-in-progress (no matter what type it is) has always been a Current Asset.

So often Manager quotes that it does this that or the other process to maintain the integrity of accounting principles - this work-in-progress approach directly conflicts with that stand.

Surely its the Business’s decision when it wants to take up revenue, Not Manager’s

Billable time in Manager is both asset and income.

When you record billable time, asset account will be debited and income account will be credited.

@jon, the general rule in accrual accounting is to recognize revenue when it is earned. Since you are in the US, this quote from the IRS is especially germane: “Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy.” By extension, the same would be true accounting period by accounting period or even day by day. How far you carry that, of course, depends upon what is reasonable. But however granular you get, the work in progress is income.

Assuming that you are authorized by the customer to perform the work, and that the customer has agreed in some way (verbal contracts are binding) to pay you for it, performance of the work itself establishes your right to payment. And the agreed rate fixes the amount. So you should recognize the revenue, even though not yet invoiced. Until it is invoiced, it represents both an asset–Billable time --and income–Billable time - movement. (To emphasize its purpose, I have renamed the account Billable time - work in progress.) Invoicing transfers the asset to Accounts receivable, another asset account, to reflect progress towards payment. At the same time, the income is transferred to the regular income account for billable time. (I’ve named mine Service sales - billable time.

The point is that without showing the work in progress in a temporary income account, the debit to the asset account cannot be matched by a credit.

This is no different from a manufacturer who has partially completed manufactured goods. Value has been added, so work in progress must account for it.

Now, if you use cash accounting, forget everything I said. Then, the only thing that matters is when you get paid.

@Tut, if the contract states, for example, that work is to be billed on the first of the following month, then the contractor has no right to receive income for December work until January. Moreover, a contract may be structured so the hourly rate changes based on the total number of hours during the month, with a lower (or higher) per-hour rate as the total number of hours rises; in that case, there’s no accurate way to value the work until the month has ended and the total number of hours for the month is known.

Is there an accounting reason why Billable time in progress can’t be debited to an asset and credited to a liability (contra-asset) account?

@Lubos: Breaking out Billable time - movement and having a separate total called Net profit (loss) before WIP sounds like a reasonable solution. But how do I do that? I really cannot figure out how to use the new Chart of Accounts features.

I think most accountants (and tax auditors) would argue that the right to receive the income was established when the work was performed. The fact the contract specifies later billing is immaterial. This situation is sometimes called accrued revenue, and there is a good discussion of it at http://www.accountingtools.com/questions-and-answers/what-is-accrued-revenue.html, including a very relevant example.

IRS Publication 334 includes a couple somewhat relevant clauses on your issues about changing billing rates and uncertainty in pricing:

Estimated income. If you include a reasonably estimated amount in gross income, and later determine the exact amount is different, take the difference into account in the tax year in which you make the determination.
Change in payment schedule for services. If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a lower rate until you complete the services and then receive the difference.

There are a couple of reasons. First, good accounting practice pairs contra accounts with regular accounts of the same class. So Fixed Assets is paired with its contra account, Accumulated Depreciation. But both are considered and llisted as asset accounts, with their net representing current book value of the fixed assets. A liability account is not considered a contra asset account, which brings up the second reason.

Work in progress is not a liability. A liability represents a legal obligation to pay another party. With work in progress, you have no obligation to pay anything to your customer. Quite the contrary, your customer has an obligation to pay you. That is why work in progress is an asset, because you have a reasonable expectation that it will generate cash in the future. The fact that you have not yet invoiced only means you have not yet made formal demand for payment in accordance with the terms of your contract or agreement with the customer.

One last thought: I think you are fighting an unnecessary fight. Balance sheets and income statements have been showing work in progress much like Manager does since the Medicis invented debits and credits in Florence during the renaissance. While you are, of course, free to develop any kind of management report you like for your own business, sometimes it is easier to adopt the tried and true. You will certainly fare better that way if you are subjected to an audit. :smiley:

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So in the example from the page you cite, it says:

ABC International has a consulting project with a large client, under which the consulting agreement clearly delineates two milestones, after each of which the client owes $50,000 to ABC. Since the agreement only allows for billing at the end of the project for $100,000, ABC must create the following journal entry to record reaching the first milestone:
 
Dr. Accrued billings            50,000
Cr.      Consulting revenue         50,000

Even there, the first $50,000 isn’t considered accrued until the first milestone is reached. Surely there was plenty of work done before the milestone, but there is no right to receive the income until the milestone. In my case, the milestone is the end of the month, no?

I’m not sure whether that example is applicable. Billable time is about recording time you are likely to invoice client for.

If you have an agreement with a client where they pay you for results some fixed amount, you wouldn’t be using Billable time in the first place as there is no need to track the time (you will get paid the same amount regardless how much time you spend on the task)

My point was that the first 50,000 of billings was accrued before the invoice was sent. In the example cited, the invoice could not be sent until the entire project was finished. The example didn’t actually specify whether billing was to be by the hour or just by the milestone.

I prefer to include Billable Time as income because it is important when analysing the financial performance of a business for a specified period to take into account its production as represented by Billable Time. If the unbilled time is not taxable until is invoiced you can enter a reconciling adjustment on a tax return or at the end of the financial year transfer the balance of Work in Progress from the income account to a liability account named Deferred Income or Unearned Income.

Accounting is a recorder of actual circumstances, it is not a predictor or creator of future circumstances nor can it ever gazump contract law. Accounting is an information service to a Business NOT a controller of the Business. @Tut has made several statements which need to be reviewed

  1. “general rule in accrual accounting is to recognize revenue when it is earned” - Yes, but only when you are legally entitled to the revenue. If a contract stipulates an invoicing point then you have no legal right until then otherwise you would be artificially inflating revenue. Large failing corporations did this practice (bringing forward revenue) in the past to hide their true results

  2. Quoting the IRS “in which ALL EVENTS that fix your right to receive the income have occurred” An essential event is the contract stipulation of invoicing date, if that event hasn’t occurred then you don’t have the right to receive the income.

  3. “work in progress is income” Incorrect - refer to point 6.

  4. “performance of the work itself establishes your right to payment” once again incorrect, the terms of the contact determines the right to payment. On that superstition if two weeks work performance had been complete then there would be a right to payment - no, because that doesn’t comply with the contract.

  5. “without showing the work in progress in a temporary income account, the debit to the asset account cannot be matched by a credit” Yes it can please refer to @tony’s post “to a liability account named Deferred Income or Unearned Income”

  6. “This is no different from a manufacturer who has partially completed manufactured goods”. A manufacturer would transfer from Asset - Inventory Raw materials to Asset - Production Work-in-Progress to Asset - Inventory Finished Goods. At no time throughout this process has there been generated a Income Production Work-in-Progress entry. So how is it no different?

Business inputs (raw materials, labour, time, consultants) are Business inputs and you can’t change the accounting process or outcome because of the input. Lets take @jon situation a stage further. Lets assume there is a choice of outsourcing or in-house performance of the contract.

If its outsourced the contractor’s invoice doesn’t create an Income - Billable Work in Progress entry, so why should the in-house performance create an Income - Billable Work in Progress for exactly the same work.

Then we have the tax considerations, why would a business want to inflate its revenues with increased revenues before they are entitled to invoice those revenues. Ok, as @tony states you can make a reconciling adjustment on the tax return or transfer the Work-in-Progress to a liability account, but why have these complications when Manager can address the issue without needing special treatment.

Now for a couple of asides
a) “I think most accountants (and tax auditors) would argue that the right to receive the income was established when the work was performed” If any accountant/auditor put that to me (considering the contract terms) I would seriously be questioning their abilities - why would they advocate artificially increasing one’s taxable income. If any adjustment was to be made, you would transfer any related salary costs from the expense account.
b) “The fact the contract specifies later billing is immaterial” Tell that to a Judge. Accounting doesn’t gazump contract law. If one is going to put accounting above (superior to) the contract, then the role of accounting is not clearly understood
c) “IRS Publication 334 includes changing billing rates and uncertainty in pricing” Neither changing billing rates or uncertainty in pricing are at issue here so these clauses are completely irrelevant.
d) “A liability account is not considered a contra asset account” Incorrect, accounting standards requires finance leases (equipment, vehicles) to be fully taken up in the balance sheet, this involves an asset and corresponding (contra) liability account.

@jon asked “Is there an accounting reason why Billable time in progress can’t be debited to an asset and credited to a liability (contra-asset) account?” The simple answer is there is no reason why it can’t happen - but it would appear in Manager you will need to journal it to correct your accounts.

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Wow! What a blast, @Brucanna. I have no interest in rebutting your points one by one. Let’s just agree that standards and practices vary in different jurisdictions. As you may know, the IASB and FASB have recently completed a huge project trying to standardize their guidance for recognizing revenue. So I don’t think you can fairly say that viewpoints that don’t match yours are necessarily wrong, just different.

Several of my comments were made from a viewpoint common in the US for the type of work @Jon does. Regardless of the agreed milestones or dates at which progress invoices might normally be submitted under a specific contract’s provisions, common business law also entitles one to recovery for work performed. Think of what might otherwise happen if a customer arbitrarily cancelled a contract (verbal or written) just before the agreed invoicing date. The provider would be entitled to recover costs and a reasonable profit on work performed to date. Otherwise, companies would be unilaterally cancelling contracts to avoid payment all the time.

Certainly there are differences of judgement in when all elements involved in recognizing revenue have been satisfied. But there is no question it can be appropriate long before an invoice is submitted, because to rigidly insist otherwise would condemn companies to misrepresenting their financial position. For example, imagine a large contract to be billed at completion several years down the road. It would be inaccurate to show no revenue from billings against that contract for several years. In fact, the tax man would probably accuse you of tax evasion.

Anyway, I was trying to offer some perspectives to help out another user. Hopefully, I did that.