Definition: Utilities expense is the cost consumed in a reporting period related to the following types of expenditures:
- Heat (gas)
The category is sometimes also associated with expenditures for ongoing telephone and internet service.
The utilities expense incurred by a company's manufacturing operations is considered part of its factory overhead. As such, the expense is accumulated in a cost pool and then allocated to the units produced in the period when the expense was incurred. If not all units produced are sold in the period, this means that some of the utilities expense will be recorded as part of the inventory asset, rather than being immediately charged to expense.
Under the accrual basis of accounting, the amount recorded as utilities expense relates to the actual consumption of the indicated items in a period, even if the supplier has not yet issued an invoice (invoices are frequently delayed for utilities). The portion of a utility invoice applicable to the current period may be so large that any residual balance applying to a different period is immaterial, and so can be charged to the current period.
For example, ABC International receives a water bill from the local water company that covers the period from the 26th day of the preceding month to the 25th day of the current month, in the amount of $2,000. Since 25/30 of the bill applies to the current month, which is $1,667, the controller of ABC concludes that the portion of the invoice applicable to the preceding month is immaterial, and charges the entire amount to the current month.
Under the cash basis of accounting, the amount recorded relates to the cash paid within the period for the indicated items. Thus, the cash basis relies upon the receipt of a supplier invoice, and still only records the expense when the invoice has been paid.
In short, the accrual basis of accounting accelerates the recognition of utilities expenses in comparison to the cash basis of accounting. However, over the long term, the results under both methods will be approximately the same.
The utility billings issued by utility companies are usually among the invoices most commonly double-paid by a business, because the invoices typically state a billing period, rather than an invoice number. Since there is no unique identifier on the invoice, a company has no way of telling if it has already paid the bill. This problem can be avoided by using alternative methodologies to derive an invoice number, such as using the date range of an invoice as its invoice number.
A utilities provider may require a deposit from a business prior to providing service. If so, the business records this deposit as an asset on its balance sheet, rather than charging it to expense.