Utilities Expense Definition, Classifications, Accounting Treatment

It must be remembered that the cash requirement is not a measure of funds that the utility maintains for all purposes, such as for construction or for payment of dividends and interest. It is the amount that must be maintained for day-to-day operations. When the ratepayer pays his bill, he has compensated the investor for the interest on construction funds and a return on the investor’s capital; therefore construction cash, interest and dividends are not included in the cash requirement. In determining the deduction from the operational cash requirement, it is necessary to determine an approximate level of earnings on which the federal income tax accrual will be developed.

• He is the sole author of all the materials on AccountingCoach.com.
• Usually, companies recognize utility expenses before paying them.
• This more complete picture helps users of financial statements to better understand a company’s present financial health and predict its future financial position.

Telephone and mobile expenses are considered utilities if used for business purposes. It helps them reach the clients or prospective clients, thus adding value to the sales and eventually the organization’s profit. Table 3-B the rules of working with tax returns for unexperienced accountants has been included to assist the engineer in evaluating the effect of changes in working cash items on the working cash allowance. When a company accrues (accumulates) expenses, its portion of unpaid bills also accumulates.

Example of Utilities Expenses

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. As stated in Chapter 1, Paragraph 7, one working cash allowance at both present and proposed rates should be used in the test year. The state and federal corporation income taxes should be the estimated tax accruals that would result based upon the rate of return recommended by the staff’s rate or return expert.

Inventory assets are current accounts, including raw materials, finished goods, and work-in-progress goods. However, the utility provider will often require a deposit from the business entity before providing the service. In such cases, the business records the deposit as an asset instead of charging it to expense. 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. The portion of a utility bill applicable to the current period can be larger than any residual balance applying to a different period that stands immaterial, which means the residual balance, can also be charged to the current period. The “accounts receivable” method will yield a more representative lag experienced by the utility for the entire year which will not be subjected to any sampling variability.

Utilities Expense

It requires recording the expense in the relevant accounting along with the compensation. Usually, companies recognize utility expenses before paying them. One final crucial aspect of utility expense is in accrual accounting. Companies must record this expense when it occurs rather than when compensated.

For utilities operated by individuals or partnerships, a deduction for income tax accrual is not appropriate, inasmuch as the individuals or partners must pay income taxes on substantially a current basis. Therefore, for such utilities the operational cash requirement is acceptable as the working cash allowance. A sample calculation for this type of utility is shown in Table 2-A.

Since book depreciation expense is occurring uniformly day by day and accumulated depreciation is deducted from the rate base, the practice is to include depreciation provisions at zero lag days. Public utilities incur basic variable costs such as electricity, water, gas, internet, etc. 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.

What Is a Regulatory Asset?

Because the company actually incurred 12 months’ worth of salary expenses, an adjusting journal entry is recorded at the end of the accounting period for the last month’s expense. The adjusting entry will be dated Dec. 31 and will have a debit to the salary expenses account on the income statement and a credit to the salaries payable account on the balance sheet. The accrual basis and the cash basis of accounting basis will record these utilities differently. With the accrual basis of accounting, the total amount recorded as utilities expense is a reflection of the cost of the actual usage of the utilities during the reporting period.

In this article, we see whether utilities expense is a debit or a credit, what it is, and the journal entries. This balance sheet account includes the utility’s current cash monies on hand and bank deposits except those classed as petty cash or other working funds. The largest portion in this account will generally be actually working, such as cash on hand to pay expenses prior to the receipt of payments from consumers. Other amounts of each may be on hand to pay dividends, debt interest or costs for construction purposes. The account fluctuates with regular frequency depending upon anticipated large cash outlays such as accrued taxes, bond interest, dividends, and construction expenditures.

Other Classifications of Utilities Expenses

Expenses for administrative, manufacturing, and operational functions are all a part of company overhead expenditure, thus falling under utility expenses. Advertising, rent, and marketing expenses are all included in the utility expense category. The operational cash requirement is analyzed for those items such as working funds and special deposits which can be assigned directly to the particular department and/or district. The remainder of the items not directly assignable are then allocated to the respective departments and/or districts on the four-factor basis.

It is impossible to heavy a healthy and constructive work environment without a stable electricity supply. Hence, this falls under the basic utility expense category. 8 “Any construction cash capital needed is an element of a cost of capital and is not includible in rate base.” Pacific Gas and Electric Company, Decision No. 43368, 49 Cal. This account represents monies which will be spent in the future, and for which provision has been made through charges to operating expense in prior years or which represents funds and receipts slated to be used to reduce expenses. The amounts of notes receivable that should be included in the requirements will depend upon the extent to which they are interest bearing. Those notes resulting from utility operations that do not bear interest may be included in the requirement.

Amounts Withheld from Employees

In turn, the cost of rendering service is advanced to the utility by the utility’s suppliers and employees and by taxing agencies. As the average lag in payment of a utility’s expenses is generally longer than the lag in receiving revenues, the utility has funds which are not supplied by its investors available for its use. In determining the cash requirement, the only amounts which should be considered are the required minimum bank deposits that must be maintained and reasonable amounts of working funds. The determination of the amount of money required to pay expenses in advance of receipt of revenues is made by the lag study.

This expense comprises a mix of fixed fee components and variable charges as per usage. This amount includes monies withheld from the employees and which are available to the utility until such time as payments are required. Savings Bonds, other state and federal payroll taxes, premiums for group insurance, and contributions to pension plans. These amounts represent monies accrued through operating expenses for future liabilities which the utility has available until payments to employees for vacation and sick leave are made. This account includes those debits that are in the process of amortization and which are not included in the other current asset accounts. These expenses may include abnormal expenses which are being amortized to operating expenses and uncleared amounts from the clearing accounts.

Deferred Credits

The net balancing amount is taken as the goods and services. The determination of the lag days for this amount is determined by analyzing the disbursement journal for payments for the goods and services received. As indicated on the lower portion of Table 3-A, there is deducted from the amount of current assets accounts certain current liabilities which represent monies provided from sources other than the investors for the operation of the utility. These accounts may include monies already derived through rates to offset a future liability which the company has not incurred, monies received from customers for the procurement of services, and amounts withheld from employees. These amounts are intermingled in the cash balances or invested in the plant accounts. Therefore, if these amounts are not excluded, the investors in effect would be compensated for funds which they have not supplied.

These funds are recognized in most instances as investors’ funds necessary for the economical and efficient operation of the utility. In essence, Utilities expenses are not always listed as such. 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.

However, how they are recorded in the books of accounts matters so as to maintain accurate accounting records. Failure to record utility expenses will bring about accounting errors such as errors of omission. Also, if they are recorded wrongly, it may result in the error of complete reversal entry. This has brought about questions with regard to whether utilities expense is a debit or credit entry.

The method consisted essentially of the determination of allowances by consideration of average weighted periods of time during which a company has money invested in the business for the purpose of paying operating expenses. Dr. Field’s method was used primarily in connection with railroad valuations. When the company’s accounting department receives the bill for the total amount of salaries due, the accounts payable account is credited. Accounts payable is found in the current liabilities section of the balance sheet and represents the short-term liabilities of a company. After the debt has been paid off, the accounts payable account is debited and the cash account is credited. The cash basis on the other hand will record it when the payment takes place.

awais

all author posts