Is utilities expense debit or credit? Usually, businesses (as well as individuals), incur costs when they make use of things like electricity, water, etc., as these items are useful. For instance, a manufacturing firm or a cyber cafe cannot operate without a power supply, or a restaurant owner cannot operate without a water supply. The expenses incurred in order to use these items are tagged utility expenses.
It is not out of place for a business to record these expenses when they are incurred. However, how they are recorded in the books of accounts matters so as to maintain accurate accounting records. Failure to record utility expenses will bring about accounting errors such as errors of omission. Also, if they are recorded wrongly, it may result in the error of complete reversal entry. This has brought about questions with regard to whether utilities expense is a debit or credit entry. In this article, we see whether utilities expense is a debit or a credit, what it is, and the journal entries.
See also: Salaries Expense Debit or Credit?
What is utilities expense?
A utilities expense is defined as the cost a business incurs for the use of infrastructure provided by utility companies such as electricity, water supply, natural gas, sewage, and telephone services.
The utilities expense is on the basis of the amount used during an accounting period and can be included as part of the business’s operating expenses in the income statement. These expenses are relevant for running the business and are variable costs that change on the basis of consumption. Depending on the utility bill’s size, a business might maintain separate general ledger accounts for each utility, or combine them into a single utilities expense account.
The accrual basis and the cash basis of accounting basis will record these utilities differently. With the accrual basis of accounting, the total amount recorded as utilities expense is a reflection of the cost of the actual usage of the utilities during the reporting period. It does not matter whether the utility supplier has sent an invoice to the company or not. If there is an amount that should be charged that is applicable to the previous month, it is charged to the current month.
The cash basis on the other hand will record it when the payment takes place. In other words, the total amount recorded for the use of utilities for each period is based on the amount of cash that the business/company has paid for the said utilities during the period covered. By implication, the cash basis may mean that the expense is recorded in a later period.
Depending on how a company makes use of utilities, a company accountant may allocate costs that are associated with utility use to various departments. For example, the total amount of utilities used in order to help a company to sell goods or services may be listed as selling expenses, utilities used in carrying out administrative duties may be listed as administrative expenses, Utilities that are used in helping with manufacturing operations are listed under factory overhead, and so on.
In essence, Utilities expenses are not always listed as such. This implies that the expenses become a part of a cost pool which is then divided up in accordance with the units that are produced during the billing period. There are times when not all units are sold. The expenses that are tied to the units that are not sold are usually listed as inventory assets, and not immediately listed as an expense.
There may be cases whereby a provider of utilities will require a deposit from a business prior to the provision of service. In this case, the business will record this deposit as an asset on its balance sheet instead of charging it to expenses.
See also: Rent Expense Debit or Credit?
Debit and credit meaning
In making use of double-entry accounting, there is a need to know when to debit and when to credit accounts as these are two important accounting terms that need to be understood. Debits and credits are the true backbones of accounting because any accounting transaction recorded in a ledger needs to have a debit and credit entry regardless of whether it is hand-written or in one’s accounting software. It is important to know when to debit as well as when to credit an account, just as we want to know when to debit or credit utilities expense.
Debits and credits are used to make sure that one is adhering to the accounting equation; Assets = Liabilities + Equity.
In double-entry bookkeeping, there are at least two accounts involved in the case of any recorded transaction. One account is debited while the other is credited. While debits are always on the left side of the entry, credits are always on the right side. These debits and credits should always be equal to each other for the accounts to remain in balance.
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. It brings about a decrease in asset accounts and expense accounts (utilities expense inclusive).
Is utilities expense debit or credit?
Utilities expense is a debit and not a credit entry. Remember that expenses generally are increased by debit entries. 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.
Expenses generally cause a decrease in owners’ equity. 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.
See also: Drawings Debit or Credit?
Debit and credit journal entries for utilities expense
Usually, while a business receives a utility bill, it usually has up to 25 days to pay the balance due. In this case, the journal entry to record the expense will be:
When the due amount is later paid, the journal entry will be as follows:
There are instances in which a business needs to pay and accrue a utility before the arrival of the bill. This is especially true at the end of an accounting period when there will be a material impact on the amount of utilities used on the financial statements if they are not disclosed. In this case, the journal entry to accrue the expense will be:
When the utility bill arrives, there will be a reversal in the accrual journal entry and the transaction will be recorded as usual. In cases whereby the company is yet to receive a utility invoice from the supplier at the period end adjusting, it can make use of the previous period invoice to make the journal entries for utilities expense if the difference from the current period has been estimated to be immaterial based on past experiences. This practice is common for the utilities expense as many companies usually only receive the current month’s invoice of the utility usage within a few days after the period-end adjusting entry.
Examples of utilities expense debit and credit journal entries
A business receives an electricity invoice that amounts to $2,000 and keeps a record of this in the books of accounts with the following journal entries:
Debit and credit journal entries for a utilities expense invoice
|Utilities expense (electricity)||2,000|
This journal entry records a debit for utilities expense account which represents the cost to the business. It then makes a credit entry for utilities payable, also known as accounts payable to reflect the liability of the business to make payment to the electricity supplier for the amount of service received during the period.
Debit and credit journal entries for the utilities expense paid