Back ChargeDefined with Examples & More

Written By:
Lisa Borga

What is a Back Charge?

A back charge is an invoice made to collect on an expense incurred in a previous billing period.

This could be caused by several potential reasons, including an error in the original billing, the seller themselves receiving a late bill from a supplier, or a late billing rule provided by the sales agreement.

Back charges are generally undesirable because they can be difficult to recover from customers who expect to receive invoices from suppliers in the same period.

Due to the increased difficulty with recoverability and potentially damaging relationships with customers, some companies choose to write these charges off rather than create a back charge.

Back Charges Explained

Back charges are a bill for expenses that occurred in a previous period, and as a result, they occur most frequently in industries where billing can be complex.

This includes industries such as construction, credit cards, and other financial services.

Due to these industries’ nature and the relatively high frequency of accidents that may occur, back charges are not uncommon and may be issued as soon as the accident occurs or during a later billing period.

When a back charge occurs due to a failure on the customer’s part to pay a bill, the company performing the back charge may include additional fees or interest at their discretion.

However, in some cases, this can lead to accusations that the company intentionally failed to notify the customer of the back charge in order to collect additional charges off of the sum due.

As a result, it is generally considered ethically important for companies to report back charges as soon as they are incurred.

Generally, it is best practice to avoid back charges whenever possible for most businesses.

In most industries, customers do not expect to receive back charges, and they may be mistaken for a billing error.

Often back charges take longer for businesses to collect, if they can successfully do so at all.

However, typically the quicker that these charges are performed, the more likely it is that a business will succeed in receiving payment from a customer.

Who Performs Back Charges

Any business can back charge a customer, which may be a company or an individual.

However, back charges are most common in business-to-business dynamics between a company and its supplier.

In these cases, the vendor may provide the company with a bill for a back charge due to one of many circumstances.

However, no matter what the circumstances are, unless the company receiving the back charge expects the bill, it is crucial that the charge be performed as quickly as possible.

If the company believed that it had already paid what it owed, such a charge may come as a shock and be difficult to pay.

If the back charge is being made due to a mistake on the paying company’s end, vendors may also charge an additional fee due to the time and effort involved in performing a back charge.  

The Importance of Back Charges

Accurate accounting is a crucial component of business success and effective cash management.

In order to prevent falling short and ensure that all of the money a company is owed is received, a company must ensure that its accounts receivable and accounts payable are accurate.

When back charges occur either to charge a customer or because the business is being charged by a vendor, it may show that a company’s accounting was flawed.

This could cause a company to fall short on cash if it has to make an unexpected payment or if it does not receive an expected payment.

As a result, back charges are generally highly undesirable and may show that a company needs to work on its accounting for receivables or payables.

Alternatively, if the issue stems from customers failing to pay invoices, a company may wish to adjust its strategy for offering credit to customers.

Back Charge vs. Change Order

Back Charges and Change Orders are two of the most common factors in changing the final cost of an agreed-upon good or service.

However, these are two very distinct concepts, and it is important to understand the difference between them.

With a back charge, the one sending the bill is doing so for an outstanding expense, and this does not require any advance notice or permission from the customer.

However, a change order is an agreed-upon modification to the existing agreement between the two parties, which requires a mutual agreement in order to make the change.

Advantages and Disadvantages of Back Charges

Advantages of Back Charges

• A back charge can allow a company to potentially prevent losses that may occur due to mistakes performed in the billing process, such as sending an invoice for less than the amount due.
• A back charge can allow a vendor to retain customers who fail to make a payment in a given period by giving them another chance to make payments for the amount due. Without such a tool, a missed payment could end a mutually beneficial relationship between a vendor and a customer.

Disadvantages of Back Charges

• Back charges are often difficult to collect and may take longer to convert into cash than a timely charge.
• Back charges may be mistaken as billing errors or an attempt to make additional charges beyond the originally agreed-upon amount. As a result, it can sour the relationship between a company and its customers.

Example of a Back Charge

As an example of back charges, consider ABC Retailers.

This company sells dishware to consumers and makes monthly purchases from a vendor to replenish its stock.

However, ABC Retailers changed accountants and forgot to pay the invoice for its new inventory one month, despite receiving its regular order from the supplier.

As a result, for the following month, ABC Retailer’s vendor chose to include a back charge for the previous month’s expenses in addition to the amount for the current month on its invoice.

Initially, ABC Retailer’s accountant was shocked and angered by the extra charge, but after checking the company’s accounting records and bank statements, they realized the mistake and paid for the full invoice amount.

Key Takeaways

• A back charge is an invoice billing for expenses the seller incurred in a previous billing period.
• Back charges can present an increased risk of recoverability and potentially anger customers and, as a result, generally should be avoided whenever possible.
• When an accident in billing is discovered, it should be reported to the customer as quickly as possible to avoid accusations of unethical practices.