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Utility expense is the cost incurred in a reporting by using utilities like electricity, heat, sewage, waste disposable, and water. Sometimes, ongoing telephone and internet service expenditures also fall under the utility expense category. This expense comprises a mix of fixed fee components and variable charges as per usage.
Accounting for Utility Expenses
The expense incurred on utilities by a company’s manufacturing operations falls under the category of its factory overhead. The expense is accumulated in a cost pool and then allotted to the units produced within a given period when the expense is incurred. Suppose all units produced are sold within the accounting period, then the utility expense will be recorded as an inventory asset and not immediately be charged to the expense. Suppose a utility provider requires a deposit from the business before providing the service. In that case, the business accounts for this deposit as an asset on its balance sheet, and does not consider it an expense.
How do we treat Utility Expenses under the Accrual Basis of Accounting?
As per the accrual basis of accounting, the recorded utility expense amount relates to the actual consumption of the product in a period, irrespective of whether the supplier has issued an invoice. The portion of a utility bill applicable to the current period can be larger than any residual balance applying to a different period that stands immaterial, which means the residual balance, can also be charged to the current period.
Suppose a company has an electricity bill from 10th January to 10th February of Rs 5000. Instead of recording 20 days in January and ten days in February, the company can account for the entire bill in January, as that period has a larger bill amount.
How do we treat Utility Expenses under the Cash Basis of Accounting?
As per the cash basis of accounting, the recorded amount relates to the cash paid for the given products or services within a mentioned period. Hence, the cash basis of accounting relies on the receipt of an invoice and only records the expense once the invoice has been paid. In the long term, the results under either of the two methods will be the same.
“Accrual Accounting accelerates the recognition of utility expenses as compared to the cash basis of accounting.”
Importance of Utility Expenses
Utility expense plays a vital role as these expenses enable the smooth functioning of basic business activities. The importance of utility expenses is:
- Utility expenses are essential expenses necessary for the smooth functioning of the business.
- Utility expense is charged per usage; less usage means lesser expenditure.
- The service providers usually enable services at minimal cost without compromising the quality, like in the case of power back-ups. The authority in charge of the service ensures smooth functioning to prevent huge losses for the businessman.
Types of Utility Expenses
There are various types of utility expenses, such as:
1. Telephone Expense:
Telephone and mobile expenses are considered utilities if used for business purposes. It helps them reach the clients or prospective clients, thus adding value to the sales and eventually the organization’s profit.
2. Internet expense:
The Internet is what every organization must-have, as it enables smoother functioning, and coordination, and is very widely used to get work done. Internet is one of the most important utilities associated with the growth factor. It allows easy payments, sending official documents, and so much more.
3. Water Charges:
Water is charged as per the usage. Also, it is charged differently for commercial organizations. It is one of the basic utility services that every organization needs.
4. Electricity bills:
Electricity is another major utility expense for any organization. It is impossible to heavy a healthy and constructive work environment without a stable electricity supply. Hence, this falls under the basic utility expense category.
5. Other Cost:
Other cost varies for each business; a security guard’s salary is a utility expense in the case of banks and ATMs. All the maintenance expenses fall under utility expenses for all public utilities and services.
All about Utility Bills
Expenses for administrative, manufacturing, and operational functions are all a part of company overhead expenditure, thus falling under utility expenses. Advertising, rent, and marketing expenses are all included in the utility expense category.
What is Utilities Payable?
Utilities payable is money owed for the utility services provided by suppliers, such as gas, water, or electricity. A current liability is when an amount is payable for the current financial year.
Is Paying Utilities An Asset Or Liability? Are Utilities Expenses Liabilities?
Utility bills refer to the utility’s contribution to the cost of gas, electricity, water, and other services before the payment. A company continues to receive the gas, water, electricity, and various other amenities before paying the bill. Hence, it becomes the company’s liability until the bills are paid.
Journal Entry:
- Debit: Utility Expense
- Credit: Accounts Payable
Utilities payable are generally considered a current liability as the services rendered by the provider is being used by the business entity, and the invoice usually remains unsettled for a brief period of time. It ideally takes less than a year to settle the utility expense account.
Are Utilities Considered Assets?
The utility of certain expenditures can be witnessed in future periods, making it an asset. When a business entity purchases an asset, it is recorded on the balance sheet. Inventory assets are current accounts, including raw materials, finished goods, and work-in-progress goods. However, the utility provider will often require a deposit from the business entity before providing the service. In such cases, the business records the deposit as an asset instead of charging it to expense.
To Sum-up!
Irrespective of the basis of accounting, a utility expense is considered an asset if the amount for the service has been paid in advance. It is considered a liability if the service in use has not been paid for yet by the business.
