Understanding Back Charges: Definition, Causes & Avoidance

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 receivableAccounts ReceivableAccounts Receivable (AR) represents the credit sales of a business, which have not yet been collected from its customers. Companies allow 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 payableAccounts PayableAccounts payable is a liability incurred when an organization receives goods or services from its suppliers on credit. Accounts payables are 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

Example

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.

Summary

For every business, getting paid for the products and servicesProducts and ServicesA product is a tangible item that is put on the market for acquisition, attention, or consumption while a service is an intangible item, which arises from 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.

More Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! 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:

• Accounts ExpensesAccounts ExpensesAn expense in accounting is the money spent, or costs incurred, by a business in their effort to generate revenues. Essentially, accounts
• Debt DefaultDebt DefaultA debt default happens when a borrower fails to pay his or her loan at the time it is due. The time a default happens varies, depending on the terms agreed upon by the creditor and the borrower. Some loans default after missing one payment, while others default only after three or more payments are missed.
• Fixed and Variable CostsFixed and Variable CostsCost is something that can be classified in several ways depending on its nature. One of the most popular methods is classification according
• Service ChargeService ChargeA service charge, also called a service fee, refers to a fee collected to pay for services that relate to a product or service that is being purchased.