Utilities Expenses

Utilities expense is the cost incurred for the use of energy, heat, sewer, and water within a reporting period. In some cases, ongoing phone and internet service costs are also included in this category. Due to the fact that this cost typically consists of both a fixed price and a variable charge based on actual usage, it is regarded as a mixed cost.

Accounting For Utilities Expenses

A company's factory overhead includes the utility costs incurred by its manufacturing processes. As a result, the cost is added up in a cost pool and then divided among the units produced at the time when the cost was incurred. This means that some of the utilities expense will be recorded as part of the inventory asset rather than being immediately charged to expense if not all units produced are sold in the period.

Before starting service, a utilities supplier could request a deposit from a company. If so, rather than deducting it as an expense, the company counts this deposit as an asset on its balance sheet.

Utilities Expense Under The Accrual Basis Of Accounting

Even though the supplier has not yet sent an invoice, the amount recorded as utilities expense under the accrual basis of accounting pertains to the actual usage of the listed products in a period (invoices are frequently delayed for utilities). A utility bill's amount that applies to the current period may be so substantial that any remaining balance that applies to a different period may be irrelevant and applied to the current period instead.

For instance, ABC International receives a $2,000 water bill from the neighborhood water provider for the time period from the 26th day of the previous month to the 25th day of the current month. The controller of ABC determines that the portion of the invoice applicable to the previous month is irrelevant and charges the entire amount to the current month because 25/30th of the bill, or $1,667, applies to the current month.

Utilities Expense Under The Cash Basis Of Accounting

The amount recorded under the cash basis of accounting corresponds to the cash paid for the specified items throughout the period. As a result, the cash basis is dependent on receiving a supplier invoice, and it still only records an expense when it has been paid.

In brief, compared to the cash basis of accounting, the accrual approach expedites the recognition of utility expenses. But over the long run, both strategies will produce results that are very comparable.

Utilities Expense Best Practices

Due to the fact that utility billings typically list the billing period rather than an invoice number, they are among the bills that businesses double-pay the most frequently. A corporation has no way of knowing if it has already paid the invoice because there is no distinctive identifier on the document. Other methods of calculating an invoice number, such as using an invoice's date range as its invoice number, can be used to avoid this issue.

Conclusion

In accounting, utilities expenses are the costs incurred by a business over a given time period to use services like telephones, electricity, gas, water, sewers, etc. that are offered by public utility providers where the business is located. These costs are calculated by the company and are considered liabilities up to the time that they are paid to the appropriate service provider. The majority of the utilities are fundamental services without which the organization would be unable to function, and they therefore play a crucial role in the organization's functioning.