3 5 Use Journal Entries to Record Transactions and Post to T-Accounts Principles of Accounting, Volume 1: Financial Accounting

It is one of the basic utility services that every organization needs. An expense is a cost that has been used up, expired, or is directly related to the earning of revenues. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. The net income from the income statement will be used in the Statement of Equity. This account includes the amortized amount of any bonds the company has issued.

Utility expenses encompass public services required to operate a business or carry out household activities. In the context of household expenses, they encompass essential costs for comfortable living, such as water, electricity, gas, and maintenance. Utility expenses include machinery repair costs, selling commissions, and basic packaging expenses for commercial purposes. These expenses are calculated based on usage, and by optimizing consumption, it is possible to reduce costs. Expenses like salaries paid, machinery maintenance, and machinery rent do not form part of public utilities.

Does utility expense appear on balance sheet?

When a company is first formed, shareholders will typically put in cash. For example, an investor starts a company and seeds it with $10M. Cash (an asset) rises by $10M, and Share Capital (an equity account) rises by $10M, balancing out the balance sheet.

The next step is a calculation of any dividend that has to be paid out. After paying dividends, the remaining value is added to the balance of retained earnings continuing from previous financial years. The retained earnings recorded in the company’s balance sheet are part of the entity’s book value.

Consequently, any adjusting entries must be recorded to complete the effect of change. Retained earnings and net income both are the revenue of a business entity. Net income is recorded in the income statement of a business entity in every financial period.

Utilities expense definition

However, over the long term, the results under both methods will be approximately the same. On January 3, there was a debit balance of $20,000 in the Cash account. Since both are on the debit side, they will be added together to get a balance on $24,000 (as is seen in the balance column on the January 9 row). On January 12, there was a credit of $300 included in the Cash ledger account. Since this figure is on the credit side, this $300 is subtracted from the previous balance of $24,000 to get a new balance of $23,700.

There are many other names for the statement of retained earnings. It is also called a statement of shareholder’s equity, an equity statement, or the statement of owner’s equity. The period beginning retained earnings is a cumulative balance of all the retained earnings from prior periods. The net income or loss relates to the current year’s operations and corresponds to the net income of loss of the company. Cash dividends are paid to the shareholders, and stock dividends are bonus shares issued to the shareholders.

Importance of Utilities Expenses

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. The accrual basis of accounting recognizes utilities expenses as incurred compared to the cash basis accounting method when the bills are paid. However, both methods should eventually reflect the same final numbers.

All the maintenance expenses fall under utility expenses for all public utilities and services. A company, Red Co., incurs electricity expenses of $10,000 for a year. Similarly, it pays an annual fee of $2,000 for its phone and internet line. Usually, the company settles these bills within five days of receiving them. For example, companies must separate utilities relating to administrative work from that used in production. The latter becomes a part of the cost of sales while the remaining amount gets treated as an operating expense.

What account is utilities expense?

Operating activities generally include the cash effects of transactions and other events that enter into the determination of net income. Management is interested in the cash inflows to the company and the cash outflows from the company because these determine the company’s cash it has available to pay its bills when due. We will examine the statement of cash flows in more detail later but for now understand it is a required financial statement and is prepared last.

• In the shareholder’s equity of a company, the retained earnings are recorded by adding each year’s undistributed profits.
• Under the accrual basis of accounting, this account reports the cost of the electricity, heat, sewer, and water used during the period indicated in the heading of the income statement.
• Let’s look at one of the journal entries from Printing Plus and fill in the corresponding ledgers.
• Net income is the profit of a company that is calculated after payment of all the recurring expenses.

The amount of money transferred to the balance sheet as retained earnings rather than paying it out as dividends is included in the value of the shareholder’s equity. The withdrawals are considered capital gains, and the owner must pay capital gains tax depending on the amount withdrawn. Another way of lowering owner’s equity is by taking a loan to purchase an asset for the business, which is recorded as a liability on the balance sheet.

Other Classifications of Utilities Expenses

The liabilities represent the amount owed by the owner to lenders, creditors, investors, and other individuals or institutions who contributed to the purchase of the asset. The only difference between owner’s equity and shareholder’s equity is whether the business is tightly held (Owner’s) or widely held (Shareholder’s). Most commonly, the statement of retained earnings record beginning year balance, net income, any dividends declared or paid out. There can be further segregation of dividends paid on preferred stock and common stock. The retained earnings are calculated as the formula discussed above. The closing balance is reported as the last item in the statement of retained earnings.

He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, https://online-accounting.net/ and holds a degree from Loughborough University. Electricity is another major utility expense for any organization. It is impossible to heavy a healthy and constructive work environment without a stable electricity supply. Suppose a company has an electricity bill from 10th January to 10th February of Rs 5000.

The date of each transaction related to this account is included, a possible description of the transaction, and a reference number if available. There are debit and credit columns, storing the financial figures for each transaction, and a balance column that keeps a running total of the balance in the account after every transaction. Notice that for this entry, the rules for recording journal entries have been followed. When we introduced debits and credits, you learned about the usefulness of T-accounts as a graphic representation of any account in the general ledger. But before transactions are posted to the T-accounts, they are first recorded using special forms known as journals. In Accounting, organizations consider all expenses that directly contribute to sales, profit, and the basic necessities of the organization as utility expenses, which should be accounted for.

The concept of retained earnings is similar to a saving account or an emergency fund kept to pay the long-term expenses of a company or a large purchase. The retained earnings of a company are recorded in the shareholder’s equity section of the balance sheet. The journal shown above debits the utilities expense account which represents the cost to the business of using electricity for the period. The immediate annuities explained utilities expense incurred by a company’s manufacturing operations is considered part of its factory overhead. If so, the business records this deposit as an asset on its balance sheet, rather than charging it to expense. In making use of double-entry accounting, there is a need to know when to debit and when to credit accounts as these are two important accounting terms that need to be understood.

Liability vs Expense

If there is an amount that should be charged that is applicable to the previous month, it is charged to the current month. In this case the balance sheet liabilities (accounts payable) has been increased by 2,000, and the income statement has a utilities expense of 2,000. The expense reduces the net income, retained earnings, and therefore owners equity in the business. The balance sheet,  lists the company’s assets, liabilities, and equity (including dollar amounts) as of a specific moment in time. That specific moment is the close of business on the date of the balance sheet.