What are Utilities Expense in accounting?

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Author: Sarthak Bhalerao

Table of Contents

  1. What is Utilities Expense?
  2. Classifications of Utilities Expense
  3. Cash basis of Accounting for Utilities Expense

What is Utilities Expense?

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 a specific period, calculated, and accrued for, or payment is rendered. It has an accrual basis of accounting. Depending on how the utilities are used, a company accountant may allocate costs associated with utility use to various departments. The total amount recorded as utilities expense is equal to the actual usage of the utilities during the same period. It does not matter whether an invoice has been sent by the utility supplier to the company. If there is an amount to be charged that applied to the previous month, it is charged to the current month. It follows an accrual-based system as the consumer is first utilising the services and paying for them at the end of each cycle (month). 

Classifications of Utilities Expense

Utilities are allocated to different departments depending on how they are used. For example, the total amount of utilities used in order to help a company sell goods and/or services may be listed as a selling expense. Utilities used for administrative duties can be listed as administrative expenses. Utilities that are used to help with manufacturing operations are put into the factory overhead account. This means that all the expense is pooled which is then divided according to the units that are produced during the billing period. Sometimes, not all goods are sold, and they are stored as inventory. These unsold goods are listed as inventory assets and are not immediately listed as expenses. 

Cash basis of Accounting for Utilities Expense

The most common accounting method for utilities expense is the accrual method. However, there is another means of accounting – the cash basis method. With cash basis accounting, the total amount recorded for the use of utilities for each period is based on the amount of cash that’s been paid for said utilities during the period covered. It means that cash basis accounting may mean the expense is recorded in a later period. The accrual basis of accounting recognizes utilities expenses as incurred compared to the cash basis accounting method when the bills are paid. However, both methods should eventually reflect the same final numbers.

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Sarthak Bhalerao

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