Utilities expense is the cost incurred by using utilities such as electricity, water, waste disposal, heating, and sewage. The expenses are incurred over the course of the reporting period, calculated, and accrued for, or payment is rendered. You notice there are already figures in Accounts Payable, and the new record is placed directly underneath the […]
Utilities expense is the cost incurred by using utilities such as electricity, water, waste disposal, heating, and sewage. The expenses are incurred over the course of the reporting period, calculated, and accrued for, or payment is rendered. You notice there are already figures in Accounts Payable, and the new record is placed directly underneath the January 5 record. On this transaction, Accounts Receivable has a debit of $1,200.
The retailer receives its first utility bills on January 8th and must remit the amount by February 2. In double-entry bookkeeping, there are at least two accounts involved in the case of any recorded transaction. While debits are always on the left side of the entry, credits are always on the right side. These debits and credits should always be equal to each other for the accounts to remain in balance.
Note that we assumed the utility expense from month to month
is consistent. Another method is to use historical information about
utility expenses to estimate the expense accrual at a month end. Companies must record utility expenses as operating expenses. Practically, companies allocate their utilities to different departments. In some areas, the classification for these expenses may vary.
It does not matter whether the utility supplier has sent an invoice to the company or not. If there is an amount that should be charged that is applicable to the previous month, it is charged to the current month. In accounting, utilities expense is the cost for using the utilities during the period. It is not out of place for a business to record these expenses when they are incurred. However, how they are recorded in the books of accounts matters so as to maintain accurate accounting records.
It doesn’t need to calculate the difference between the recorded expense/accounts payable and the cash payment. And it also doesn’t need to determine whether the recorded expense/accounts payable is bigger or smaller than the cash payment to decide if they need to debit or credit the utilities expense account. When the utility bill arrives, there will be a reversal in the accrual journal entry and the transaction will be recorded as usual. This practice is common for the utilities expense as many companies usually only receive the current month’s invoice of the utility usage within a few days after the period-end adjusting entry.
It only has the electricity invoice of May with the amount of $4,800. In short, the accrual basis of accounting accelerates the recognition of utilities expenses in comparison to the cash basis of accounting. However, over the long term, the results under both methods will be approximately the same.
In our example, the utility bills for gas and electricity used in December are both an expense and a liability as of December 31. When the utility bills are paid, the liability is eliminated. Let’s assume that a retailer begins operations on December 1 and it uses natural gas for heating and it uses electricity for lighting and to operate its computers and equipment. Let’s assume that the utility reads the meters on the last day of every month and prepares the utility bills based on the meters’ readings.
Utilities used in the manufacturing process will be part of the cost of the products manufactured. Since the normal balance of equity is credit, an expense must be recorded as a debit. At the end of the accounting period, the debit balances in the expense accounts will be closed and transferred to the owner’s capital account thereby bringing about a decrease in the owner’s equity. Having said this, since utilities expense is an expense, it is debited. Remember that expenses generally are increased by debit entries. In essence, utilities are indirect expenses for the business and are debited to record the expenses.
In this case, the business will record this deposit as an asset on its balance sheet instead of charging it to expenses. The utility expense is based on the amount used during an accounting period, and is included as part of operating expenses in the income statement of the business. Only later, when the company receives the invoice from the utility supplier, does it record the actual amount in the accounting record with the payment made to the utility supplier. A utilities provider may require a deposit from a business prior to providing service.
Hence, the accrual basis of accounting recognizes utility expenses as incurred compared to the cash basis accounting method when the bill is paid. However, both methods should eventually what do financial engineers do reflect the same final numbers. Alternatively, the company can choose to make only one journal entry at the time of payment of utilities expense without the reversing entry.
Businesses often receive monthly bills for utilities, which are then recorded as expenses in that month’s financial statements. The entry typically involves a debit to the Utilities Expense account and a credit to the Accounts Payable account, reflecting the amount owed to the utility service providers. A debit is an accounting transaction that brings about an increase in asset accounts such as cash, as well as expense accounts such as utilities expense.
This is posted to the Accounts Receivable T-account on the debit side. This is posted to the Service Revenue T-account on the credit side. This is posted to the Accounts Payable T-account on the credit side. This is posted to the Cash T-account on the debit side (left side). This is posted to the Common Stock T-account on the credit side (right side).
In essence, Utilities expenses are not always listed as such. This implies that the expenses become a part of a cost pool which is then divided up in accordance with the units that are produced during the billing period. The expenses that are tied to the units that are not sold are usually listed as inventory assets, and not immediately listed as an expense. Hence utility expenses per unit cannot be different from one company to another. Depending on how different utilities are used, they may be allocated to different departments.