For a manufacturer, the cost of the utilities used in the factory will be assigned or allocated to the products as manufacturing overhead. If all of the products manufactured remain in inventory, the cost of the utilities used in the factory are embedded in the inventory's cost. When products are sold, the cost of utilities allocated to those products will automatically be expensed as part of the cost of goods sold. Under accrual accounting, the cost of the utilities that were used are included in the products' cost—whether or not the utilities have been paid. Because of double-entry accounting, the amount owed for the utilities that were used is also reported on the balance sheet as a liability.
Since natural gas, electricity, and other utilities are used before the meters are read and billed by the utility company, the company using the utilities will have to estimate (1) the amounts used during an accounting period, and (2) the amounts owed at the end of each accounting period. The amounts are entered into the accounting records through an accrual-type adjusting entry.
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