Accounting Treatment When a Company Receives a Utility Bill But Won’t Pay Right Away

As a business operates it incurs regular expenses like electricity gas, water, garbage collection, and other utilities. But when does a company record these utility expenses if payment isn’t made immediately? As an accountant or business owner, it’s important to understand the proper accounting treatment when a company receives a utility bill but won’t pay it right away.

In accrual-basis accounting, revenues and expenses are recorded when incurred, not when cash changes hands. This matches revenues and expenses to the correct accounting period for accurate financial reporting. So when a utility bill arrives, the company must record the expense even though no payment has occurred yet.

Recognizing the Expense

When the utility company meters usage and sends a bill, the company consuming the utilities has a measurable expense for that period’s usage. The expense is documented on the bill and the amount owed is now a liability.

As soon as the utility bill is received, the company should record this by debiting Utilities Expense and crediting Accounts Payable.

• Debit Utilities Expense
  • Increases expenses for utilities used
• Credit Accounts Payable
  • Increases liabilities for unpaid bills

This entry recognizes the expense and liability even though cash has not been paid yet. Utilities Expense flows through to the income statement, correctly matching expenses to revenues in the same period. Accounts Payable appears on the balance sheet since it represents an unpaid bill.

Recording Payment

At some point in the future, the company will remit payment to the utility provider. Payment requires a second entry:

• Debit Accounts Payable
  • Reduces the amount owed for utilities
• Credit Cash
  • Reduces cash as funds are paid out

When cash is sent, Accounts Payable decreases because the liability is satisfied. The original entry paired with the payment entry allows the expense and liability to be captured in the correct accounting period.

Why It Matters

If a company waits to record utilities expenses only when paid, expenses and net income would be misstated on financial statements. Expenses would lag behind revenues, overstating income. Liabilities would also be understated between metering dates and payment dates.

However, the matching principle requires matching expenses to revenues earned in the same period. Accrual accounting makes this possible by recording expenses as obligations arise rather than waiting for cash transactions.

For any incurred expense that won’t be paid right away, such as utilities, payroll, taxes, rent, etc., a company credits Accounts Payable and debits the appropriate expense account. This best reflects the expense and liability at the time it occurs.

Real World Examples

Let’s walk through some examples of accounting for unpaid utility bills

Example 1

Company A receives its August electricity bill of $500 on September 5th. Company A will pay the bill on September 30th.

On September 5th, Company A makes this accrual entry:

• Debit Electricity Expense $500
• Credit Accounts Payable $500

This records the expense and liability for August electricity consumed.

On September 30th when payment is sent, Company A makes this cash entry:

• Debit Accounts Payable $500
• Credit Cash $500

The liability is reduced because the bill has now been paid.

Example 2

Company B receives a $1,200 water bill on December 10th for usage in November and December. Company B pays $600 immediately on December 12th for the portion related to November. The $600 balance for December usage will be paid in January.

On December 10th, Company B records the entire expense and liability:

• Debit Water Expense $1,200
• Credit Accounts Payable $1,200

On December 12th when partial payment is made, Company B records:

• Debit Accounts Payable $600
• Credit Cash $600

After this payment, Accounts Payable will show a $600 balance remaining for the December portion due in January.

Key Takeaways

• Record utility expenses when incurred, not when paid
• Debit Utilities Expense, Credit Accounts Payable
• Reflects expense and obligation in correct period
• Helps match revenues and expenses
• Later, debit Accounts Payable, credit Cash when paying

Accurately recording unpaid utility bills as expenses and liabilities is an essential accounting practice for any business using utilities. It ensures financial statements properly reflect the period in which expenses and obligations occurred.