Back Charge Meaning
Back charge refers to a bill that is presented to collect the outstanding payment from any previous period. If a customer has not paid the outstanding bill, then the supplier will add the previous pending amount along with the current bill and send it to the customer.
Examples
- Mr. X is a vendor who supplies raw materials to his customers. Each month Mr. X sends a bill of $500 to his customer. In March, Mr. X has sent a similar bill of $500. After sending the bill, Mr. X realized that cost of raw material has increased. In the next month, Mr. X sent a back charge of the increased amount along with the current month’s bill. So this charge was due to an error caused by Mr. X. The charge will be an extra burden to the customer.
- Bank XYZ planned to increase the service fee of their credit cards from January. The bank didn’t inform the customers until February. So in February, back charges were sent to customers along with interest. It is a common practice for credit card issuing banks as the interest is charged daily, and they try to delay the communication to the customers in order to charge interest on the charges.
Who can take Back Charge?
A back charge can be taken by suppliers, service providers, or any company that is engaged in a transaction with other parties. Whenever a company produces a bill for services or goods supplied, then they have the authority to produce such a charge in case of an error in billing or default in the payment received from the customers.
Back Charge vs. Change Order
The back charge doesn’t require any authorization as this is an outstanding expense which the supplier forgot to charge to the customer. Change order, on the other hand, is a modification of the existing order and requires authorization. Say the customer ordered a particular arrangement, and due to some reason, if the supplier/customer is changing the order, then it will require authorization. The entire billing amount changes as the quantity changes and items in order to change.
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Advantages
- It allows suppliers to recover money in case a wrong bill was sent to the customer. If the previous bill was lesser than the original revised bill, then the supplier will incur a loss. It also allows suppliers to recover money in case of mistakes in the billing process.
- If customers fail to make previous payments, then back charges give them another opportunity to clear dues and continue the transaction with the supplier. If there was no such mechanism, then a single default in bill payment would have ended the relationship between supplier and customer.
- These charges either increase your accounts payable, if you are a customer or, increase accounts receivable if you are a supplier. So this is important in accounting. The auditor needs the true picture of accounts receivable or payable to draw financial statements correctly.
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