Companies need a base to operate in the business environment. While many companies have adopted a model to promote remote work, one element has remained the same. Despite the changes in modern business frameworks, companies still need electricity, water, and other utilities to operate. These items fall under the utility expense in the income statement.
What is Utility Expense?
Utility expense is a head used in the income statement that accumulates various expenses. Typically, it includes electricity, water, gas, internet, and phone services. Usually, companies record and report this item as an operating expense in the income statement. The amount of utility expense can vary depending on factors such as the size and location of the company and how much energy and resources it uses in its operations.
Managing utility expenses effectively is crucial for a company's profitability. Companies can reduce these expenses by implementing energy-efficient practices and investing in new technologies that use less energy. Over time, utility expense has decreased for most companies due to modern technology and better processes. However, it is still a crucial part of the income statement.
What is the accounting for Utility Expenses?
Companies must record utility expenses as operating expenses. However, most companies use the items within this head. Practically, companies allocate their utilities to different departments. In some areas, the classification for these expenses may vary. Therefore, companies may need to assign utility expenses to those areas.
For example, companies must separate utilities relating to administrative work from that used in production. The latter becomes a part of the cost of sales while the remaining amount gets treated as an operating expense. The other side of the accounting treatment for utility expenses also varies. Companies must consider the compensation method to record utility expenses.
One final crucial aspect of utility expense is in accrual accounting. Companies must record this expense when it occurs rather than when compensated. Sometimes, companies may also estimate their utility expense to report in the financial statements if a reliable figure is unavailable.
What is the journal entry for Utility Expense?
The journal entry for utility expenses is straightforward. It requires recording the expense in the relevant accounting along with the compensation. Usually, companies recognize utility expenses before paying them. Therefore, the journal entry would look as follows.
| Dr | Utility expense |
| Cr | Accrued expenses or Accounts payable |
Sometimes, companies may also pay these expenses through cash or bank when recording them. It happens when companies have automatic payments set up for their utility expenses. In that case, the journal entry is as follows.
| Dr | Utility expense |
| Cr | Bank |
Example
A company, Red Co., incurs electricity expenses of $10,000 for a year. Similarly, it pays an annual fee of $2,000 for its phone and internet line. Usually, the company settles these bills within five days of receiving them. Therefore, Red Co. records these utility expenses as follows.
| Dr | Electricity expense | $10,000 |
| Dr | Internet and phone expense | $2,000 |
| Cr | Utilities payable | $12,000 |
Conclusion
Utility expense is a head in the income statement that combines various items. Usually, these include electricity, phone, gas, and water expenses. For companies, these are a necessity required for regular operations. The accounting treatment for these records is the expense and compensation for it. However, it is crucial to recognize utility expenses according to the accruals principle in accounting.
Originally Published Here: Utility Expense: Definition, Accounting, Journal Entry, Example, Debit or Credit, Asset or Liability
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