Are utility bills an expense or a liability?

Definition of Utility Bills

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. 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.

Example of Utility Bills

Let's assume that a retailer begins operations on December 1 and it uses natural gas for heating and it uses electricity for lighting and to operate its computers and equipment. Let's assume that the utility reads the meters on the last day of every month and prepares the utility bills based on the meters' readings. The retailer receives its first utility bills on January 8th and must remit the amount by February 2.

Under the accrual basis of accounting, the retailer's income statement for the month of December must report the cost of the gas and electricity that it used during December. On its December 31 balance sheet, the retailer must report the amounts it owes to the utilities as of December 31.

If the utility bills for December's usage are not available at the time that the retailer's financial statements are prepared, the retailer will record an accrual adjusting entry that debits Utilities Expense and credits Accrued Utilities Payable for December's estimated amount.

In our example, the utility bills for gas and electricity used in December are both an expense and a liability as of December 31. When the utility bills are paid, the liability is eliminated.

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