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 the reporting period, calculated, and accrued for, or payment is rendered.
With the accrual basis of accounting, the total amount recorded as utilities expense reflects the cost of the actual usage of the utilities during the reporting 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.
- Utilities expense is the cost – during a given time period – of using things such as electricity, water, and heating.
- Depending on how utilities are used, a company accountant may allocate costs associated with utility use to various departments.
- The accrual basis of accounting and cash basis of accounting will account for utilities differently – the accrual basis will record the expense when used, and cash basis will record it when paid.
Other Classifications of Utilities Expenses
Utilities expenses are not always listed as such. Depending on how different utilities are used, they may be allocated to different departments. 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 an administrative expense.
Utilities that are used to help with manufacturing operations are commonly put into the factory overhead account. This means that the expenses become part of a cost pool, which is then divided up according to the units that are produced during the billing period. Sometimes, not all units are sold. The expenses tied to the units that aren’t sold are listed as inventory assets and not immediately listed as an expense.
Cash Basis of Accounting for Utilities Expenses
The accrual basis of accounting for utilities is the most commonly used accounting method. However, there is another means of accounting – the cash basis. 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.
We hope you enjoyed reading CFI’s guide to the accounting of utilities expenses. CFI offers the Financial Modeling & Valuation Analyst (FMVA)® certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful: