Utilities ExpenseExplained & Defined

Written By:
Lisa Borga

Utilities expense is the account used to record the cost of expenses such as water, natural gas, electricity, and sewage.

These expenses are necessary for running the business and are variable costs that change based on consumption.

Utilities expenses can be recorded as administrative expenses, selling expenses, variable overhead, among others depending on the department incurring the expenses.

Understanding Utilities Expense

For businesses that use accrual accounting, the amount they record for utilities expenses will be the cost of the utilities the business used during the period.

This amount will be recorded whether or not the business has received a bill from the utility company for the expense yet.

The expenses need to be recorded for the month in which they were incurred even though the bill for utilities is generally received in the month following the consumption of the utilities.

This may require the business to estimate the utilities expense for the period.

Recording Utilities Expenses

Utilities expenses are not always recorded as utilities expenses. Instead, they may be recorded as expenses for the department in which they were used.

Utilities used in the administrative department could be listed as administrative expenses, and those used to help make sales may be listed as sales expenses.

When utilities are used to assist with manufacturing, they are generally included in factory overhead.

These utilities expenses would be grouped with the other expenses included in variable overhead.

The variable overhead would then be divided among the units produced during the period.

If some of the units are not sold, the expenses that were allocated to the unsold units are not expensed immediately as the units will be recorded as inventory.

Recording Utilities Expenses in Cash Basis Accounting

Most businesses use accrual basis accounting. However, there are some businesses that use cash basis accounting.

If a business is using cash basis accounting, the amount the business will record for its utilities expense will be the amount it actually pays for utilities during the recording period.

This means the business may be recording the expense for utilities consumed in a previous period that it is paying for in the current period.

Businesses that use accrual accounting will recognize utilities expenses in the period in which the utilities are consumed.

Whereas businesses using cash basis accounting will recognize utilities expenses when they pay the utility bills.

The actual numbers recorded should be the same regardless of the method used.

Key Highlights

• Utilities expense includes the cost of using water, electricity, natural gas, and similar things during a specific period of time.
• Utilities are often allocated to different departments based on their use.
• Utilities expenses are accounted for differently based on whether the business uses accrual basis accounting or cash basis accounting. Businesses using the accrual basis of accounting record utilities expenses during the period in which they were incurred. Whereas businesses that use the cash basis of accounting will record utilities expenses during the period in which they are paid.