Are utility bills an expense or a liability?

The recording of retained earnings is done on the balance sheet of a company. Sometimes a separate statement for the recording of retained earnings is also prepared. The utility bill for a retailer or for a service company is an expense.

The next transaction figure of $100 is added directly below the January 12 record on the credit side. As per the accrual basis of accounting, the recorded utility expense amount relates to the actual consumption of the product in a period, irrespective of whether the supplier has issued an invoice. Utility bills are invoices received by a company for the natural gas, electricity, water, and sewer charges that the company used during a previous month or other period of time. The usage and the amount of each bill is generally based on the meters located on the company’s property.

Liability vs Expense Comparison Table

The balance sheet shows what a company owns and owes, as well as the amount invested by shareholders. Accounts payable is the amount of short-term debt or money owed to suppliers and creditors by a company. Accounts payable are short-term credit obligations purchased by a company for products and services from their supplier. This is posted to the Cash T-account on the credit side beneath the January 14 transaction. Accounts Payable has a debit of $3,500 (payment in full for the Jan. 5 purchase). You notice there is already a credit in Accounts Payable, and the new record is placed directly across from the January 5 record.

In other words, the utilities provide the gas, electricity, etc. in advance of being paid. Therefore, the company is receiving the gas, electricity, etc. before it pays for them and has a liability until the bills are paid. how long should you keep business records 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.

Debit and credit journal entries for a utilities expense invoice

Organizations using these utility records expenses based on their chosen accounting method, either accrual or cash basis. In the accrual system, the actual consumption of utilities is recorded, not just the received bills. For example, In March, we record the estimated or consumption-based expenses for electricity, even though we receive the bill in April for the previous month. Under the cash basis, expenses are recorded based on the payments made.

• The net profit is calculated by subtracting the costs of goods sold, operating expenses, administration & marketing expenses, taxes, etc., from the revenues of the business entity.
• For example, companies must separate utilities relating to administrative work from that used in production.
• Current liabilities are differentiated from long-term liabilities because current liabilities are short-term obligations that are typically due in 12 months or less.

The expense is the year-to-date or period-specific cost of utilities, while the payable is just the unpaid amount of utility bills. Thus, the utilities expense is usually much higher than the utilities payable balance. A deposit on utilities is recorded with a debit to the asset account Utilities Deposit and a credit to the asset account Cash. The account Utilities Deposit will be reported as a current asset if the company expects the amount to be returned by the utilities within one year of the balance sheet date. Utilities Expenses are an Expense and appear on the Income Statement. In short, the accrual basis of accounting accelerates the recognition of utilities expenses in comparison to the cash basis of accounting.

Consequently, any adjusting entries must be recorded to complete the effect of change. Retained earnings and net income both are the revenue of a business entity. Net income is recorded in the income statement of a business entity in every financial period.

Utilities Expenses in Accounting

All the maintenance expenses fall under utility expenses for all public utilities and services. 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. 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 company can make the utilities expense journal entry by debiting the utilities expense account and crediting the accounts payable at the period-end adjusting entry.
• Another way of lowering owner’s equity is by taking a loan to purchase an asset for the business, which is recorded as a liability on the balance sheet.
• Since this expenditure has utility through multiple future periods, it is recorded as an asset.
• The statement of cash flows shows the cash inflows and cash outflows from operating, investing, and financing activities.
• Utilities used for administrative duties can be listed as an administrative expense.
• The cash basis on the other hand will record it when the payment takes place.

The concept of retained earnings is similar to a saving account or an emergency fund kept to pay the long-term expenses of a company or a large purchase. The retained earnings of a company are recorded in the shareholder’s equity section of the balance sheet. The journal shown above debits the utilities expense account which represents the cost to the business of using electricity for the period. The utilities expense incurred by a company’s manufacturing operations is considered part of its factory overhead. If so, the business records this deposit as an asset on its balance sheet, rather than charging it to expense. 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.

Financial Statements

In business organizations, utility expenses encompass all the costs that contribute to sales, such as sales commission and manufacturing expenses. Thanks to GAAP, there are four basic financial statements everyone must prepare . Together they represent the profitability and strength of a company. The financial statement that reflects a company’s profitability is the income statement. The statement of retained earnings – also called statement of owners equity shows the change in retained earnings between the beginning and end of a period (e.g. a month or a year). The balance sheet reflects a company’s solvency and financial position.

But a good accountant should consider the thin line between Liability vs 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. 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. 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. A utilities provider may require a deposit from a business prior to providing service.

What account is utilities expense?

The liabilities represent the amount owed by the owner to lenders, creditors, investors, and other individuals or institutions who contributed to the purchase of the asset. The only difference between owner’s equity and shareholder’s equity is whether the business is tightly held (Owner’s) or widely held (Shareholder’s). Most commonly, the statement of retained earnings record beginning year balance, net income, any dividends declared or paid out. There can be further segregation of dividends paid on preferred stock and common stock. The retained earnings are calculated as the formula discussed above. The closing balance is reported as the last item in the statement of retained earnings.

Retained earnings are a part of net income, but it does not correspond to only the income of the current financial period. It is an accumulation of all the historical profits percentages kept in the company’s reserves for different purposes. Accumulation of a company’s historical revenues for reinvestment, loan payment, reserves, etc., is called retained earnings. Retained earnings are a portion of every year’s net profit retained after payment of tax and dividend payout. This liability is considered a current liability, since the amounts owed are typically payable in less than one year.

What is Utility Expense?

There are many other names for the statement of retained earnings. It is also called a statement of shareholder’s equity, an equity statement, or the statement of owner’s equity. The period beginning retained earnings is a cumulative balance of all the retained https://online-accounting.net/ earnings from prior periods. The net income or loss relates to the current year’s operations and corresponds to the net income of loss of the company. Cash dividends are paid to the shareholders, and stock dividends are bonus shares issued to the shareholders.