Understanding What are Utilities in Accounting: A Guide

To ensure accurate recording and streamline the process, many businesses use utility accounting software. This software helps track utility expenses and simplifies the management of these costs. By utilizing utility accounting software, businesses can efficiently monitor their usage and expenses, allowing for better cost control and financial planning. 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. In essence, utilities are indirect expenses for the business and are debited to record the expenses. Since they generally have a debit balance, the account has to be credited in order to decrease utility expenses. 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. It brings about a decrease in accounts such as liabilities, equity, and revenue. Credit on the other hand is an accounting transaction that brings about an increase in liability accounts such as loans payable, equity accounts such as capital, and revenue accounts such as sales.

Utility expenses are usually classified as selling expenses, administrative expenses, or factory overhead expenses depending on how the utilities are used. Implementing strategies to reduce energy consumption can help businesses save on utility costs. This is because such equipment has been designed to use less energy and therefore results in lower energy bills. Additionally, businesses should eliminate any unnecessary equipment that may be using up energy unnecessarily. In order to make sure that the budget is accurate and reliable, the company should review their energy bills regularly and adjust the budget as needed. This allows them to ensure that their utility costs remain predictable and manageable over time.

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. 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.

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. Alternatively, the company can choose wave accounting vs quickbooks online to make only one journal entry at the time of payment of utilities expense without the reversing entry. Though, in this case, it needs to determine the difference of amount between the recorded expense/accounts payable and cash payment.

What is the accounting for Utility Expenses?

The accrual basis of accounting is commonly used to record utility expenses, but there is also the cash basis accounting method which records expenses based on the cash payments made for utilities. Public utilities incur basic variable costs such as electricity, water, gas, internet, etc. Organizations using these utility records expenses based on their chosen accounting method, either accrual or cash basis. In the accrual system, the actual consumption of utilities is recorded, not just the received bills.

• These services typically include electricity, water, gas, and heating.
• Moreover, many businesses actively seek ways to reduce utility expenses through energy conservation and other cost-saving measures.
• Additionally, businesses should eliminate any unnecessary equipment that may be using up energy unnecessarily.
• This is posted to the Cash T-account on the debit side beneath the January 17 transaction.

As such, the expense is accumulated in a cost pool and then allocated to the units produced in the period when the expense was incurred. If not all units produced are sold in the period, this means that some of the utilities expense will be recorded as part of the inventory asset, rather than being immediately charged to expense. Effective budgeting and cost control for utilities expenses play a crucial role in the financial planning and profitability of businesses. By carefully analyzing historical data and making informed projections, businesses can estimate their utilities costs for a given period. This allows them to budget accordingly, allocate resources efficiently, and make proactive decisions to reduce expenses where possible.

What is utilities expense?

In the last column of the Cash ledger account is the running balance. This shows where the account stands after each transaction, as well as the final balance in the account. How do we know on which side, debit or credit, to input each of these balances? The following are selected journal entries from Printing Plus that affect the Cash account. We will use the Cash ledger account to calculate account balances. Note that this example has only one debit account and one credit account, which is considered a simple entry.

Importance and Examples of Utility Expenses

Accounting would use this document to record the inventory received. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.

Journal Entry for Utilities Expense

For example, certain states may have regulations that require businesses to purchase energy from renewable sources. To ensure that they remain compliant with regulatory requirements, businesses should stay up-to-date on changes in the energy industry. Sometimes source documents are not available when a month is
being closed.

Payment of utilities expense with reversing entry

The record is placed on the debit side of the Accounts Receivable T-account underneath the January 10 record. The record is placed on the credit side of the Service Revenue T-account underneath the January 17 record. This is posted to the Cash T-account on the debit side beneath the January 17 transaction. Accounts Receivable has a credit of $5,500 (from the Jan. 10 transaction). The record is placed on the credit side of the Accounts Receivable T-account across from the January 10 record.

Lastly, factory overhead expenses account for utilities used in manufacturing operations, which are allocated based on the units produced. It is important to note that not all units produced may be sold, and the expenses tied to unsold units are recorded as inventory assets rather than immediate expenses. In terms of accounting, utility expenses are typically recorded in the profit and loss account. The actual consumption of utilities is recorded for the accrual basis, while payments made for utilities are recorded for the cash basis accounting method. This journal entry records a debit for utilities expense account which represents the cost to the business.

Example of Utilities Expenses

By recording utility expenses in the profit and loss account, businesses can accurately assess their operating costs and make informed decisions regarding pricing strategies and cost control. In accounting, utilities expenses are usually accounted for as they are incurred. 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. In accounting, utilities expense is the cost for using the utilities during the period.