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.

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.

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.

Since they generally have a debit balance, the account has to be credited in order to decrease utility expenses. For example, in the June 30 adjusting entry, the company ABC needs to make the utilities expense journal entry for the electricity usage during the period of June. However, the company ABC has not received the electricity invoice of June yet.

• Notice that for this entry, the rules for recording journal entries have been followed.
• 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.
• We now return to our company example of Printing Plus, Lynn Sanders’ printing service company.

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.

Are utility bills an expense or a liability?

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.

• The credit is the larger of the two sides ($4,000 on the credit side as opposed to $2,500 on the debit side), so the Accounts Payable account has a credit balance of $1,500.
• We know from the accounting equation that assets increase on the debit side and decrease on the credit side.
• Since there is no unique identifier on the invoice, a company has no way of telling if it has already paid the bill.
• This is posted to the Cash T-account on the debit side (left side).
• You can see that a journal has columns labeled debit and credit.
• For example, Colfax might purchase food items in one large quantity at the beginning of each month, payable by the end of the month.

Therefore, it might only have a few accounts payable and inventory journal entries each month. Larger grocery chains might have multiple deliveries a week, and multiple entries for purchases from a variety of vendors on their accounts payable weekly. We now return to our company example of Printing Plus, Lynn Sanders’ printing service company. We will analyze and record each of the transactions for her business and discuss how this impacts the financial statements. Some of the listed transactions have been ones we have seen throughout this chapter. More detail for each of these transactions is provided, along with a few new transactions.

The Basic Accounting Equation

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 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.

Another double entry bookkeeping example for you to discover.

What is Utilities Expense?

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.

Utilities Expense Under the Accrual Basis of Accounting

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. public disclosures protect investors 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.

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Since the payment of electricity is assuming to be in the first week of July, the utilities expense in June was understated by $200. However, it is immaterial as the amount of $200 is considered to be insignificant in this case. For example, companies must separate utilities relating to administrative work from that used in production.

At the end of the month, BookNook receives separate bills for these utilities. The accounting department would then make journal entries to reflect these expenses. Now suppose Company ABC closes a month within the first
business week after month end or by April 7 in our example. March-April utility
bills will not be available until after the month is closed. In this case,
Company ABC can look back at history of monthly utility expenses and use that
in their accrual calculation.