What is Back Charge?
A back charge is an unpaid bill attributable to a prior period.
How Does Back Charge Work?
For example, let's say that Company XYZ sells $1,000 worth of auto parts to Store ABC every month. Store ABC forgets to pay for its October shipment. It's now November, so when Company XYZ sends the November shipment, it includes a $2,000 invoice: $1,000 for the November shipment and a $1,000 back charge for the October shipment, which is still outstanding.
Sometimes companies add a late fee or penalty for back charges. The penalty might be a percentage of the outstanding amount, or it might be a flat fee. The idea is to encourage prompt payments.
Why Does Back Charge Matter?
In the accounting world, back charges are generally recorded as an account payable (if the company owes the money) or an account receivable (if the company is owed the money).
When reading balance sheets, it's important to know if a company's payables and/or receivable are increasing or decreasing. Companies need to be able to pay their bills and get paid for their services, and big changes in accounts payable and receivable can provide valuable clues about whether that's happening or not.
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