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Utilities Expenses

Definition of Utilities Expenses

Utilities expenses is the cost incurred on the public utilities such as electricity, water, gas, etc. and all other basic utilities which are necessary for commercial and household purposes and in case of business organization utility expenses are the amount of money spent on utilities used to help the organization in selling goods or services, and they can be shown as selling expenses, administrative expenses etc.

Explanation

The basic variable costs related to using public utilities are utilities expenses, such as cost of electricity, cost of water, cost of gas, cost of internet, etc. Utility expenses are generally variable expenses that vary as per consumption. It can be recorded on an accrual or cash basis as per the organisation’s accounting method. If the accounting method is an accrual system, then actual utilities consumed to be recorded instead of only for the bills received. For example, in the case of electricity expenses, we receive the bill of electricity consumed for one month in the next month, so for the month of March, the bill is to be received in April, but the expenses are to be booked in March itself on estimated / consumption basis. Under the cash basis, the actual expense paid is to be recorded in the accounts. In the case of business organizations, utilities expenses are all the expenses that help in sales like sales commission, manufacturing expenses, etc.

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Example of Utilities Expenses

ABC Ltd has incurred the following expenses:

Particulars

 Amount ($)
Electricity expenses        50,000.00
Gas expenses        12,000.00
water expenses          7,500.00
rent of machinery        12,000.00
maintenance of machinery          3,000.00
salary paid        15,000.00
Municipal taxes of building          7,000.00
     106,500.00

Calculate the Utility expenses paid by the organization

Solution:

Utility expenses are considered the public utility expense, which relates to providing the basic facilities necessary for nature.

Calculation of Utility expense is as under:

Particulars

 Amount ($)
Electricity expenses        50,000.00
Gas expenses        12,000.00
water expenses          7,500.00
Municipal taxes of building          7,000.00
       76,500.00

Expenses like salaries paid, maintenance of machineries, rent of machineries does not form part of public utilities. Hence, they are not treated as utility expenses.

Types of Utilities Expenses

There are various types of utilities expense which are defined as under:

  • Telephone Expense: Telephone and mobile expenses are utilities when used for business purposes. It helps them reach the customers, which adds value to the sales and ultimately the organisation’s profit.
  • Internet expense: The Internet is very widely used in organizations and very useful for the work to be done. Internet is one of the important utilities in the growth and work of the organization. The internet can be used for e-mailing official documents, payments through net banking etc.
  • Water Charges: As the water usage is chargeable. It is charged as per the usage of the water. It is also charged differently for commercial and electric use. Water is also the utility for the organization as it adds value to the organisation’s service by usage in production, if any, cleaning, etc.
  • Gas Bill: Gas is used for residential as well as commercial purposes. Some of the organizations keep the gas for tea and coffee preparations while others use it as it forms part of their manufacturing process like; in the case of processed food business, gas is used. Both the uses add value to the organization and considered as part of utility expenses.
  • Electricity bills: Electricity is the major part of the organization. Without it, it is impossible to work as for all the things for creating a healthy work environment, working on electricity devices, manufacturing in machines, etc. Hence electricity expenses are considered as the most vital and most important basic utilities.
  • Other Cost: Other cost includes the security guard salary in the case where it is necessary to appoint like in case of banks and ATMS, maintenance expenses of the public places, association fees, lawn care etc. all other which contribute to the final product and related to public utilities and which is necessary and unavoidable are considered as utility expenses.
  • For home consumption, all the things necessary for living and without which the living can become difficult are considered the utility expenses.

Utilities Expenses in Accounting

In Accounting all the expense which directly contribute in the sales, profit and basic necessity of the organization are considered as the utility expense and are to be accounted in the accounts like electricity expenses, water expenses, internet expenses, telephone expenses, and all other variable expenses which are related to public use and necessary for running the business are considered as the utility expenses are to be accounted for.

All the utility expenses are to be recorded as expenses in the account; hence they are to be debited in the profit and loss account, and in case of accrual system of accounting, they are to be charged in profit and loss account as per the actual consumption irrespective of being paid to the supplier or bill raised by the supplier.

Generally, the accounting entry for recording Utility expenses is:

Particulars

               Amount ($)

Amount ($)
Profit and Loss A/c                                  Dr.

To Utilities Expenses A/c

                        XXX  

XXX
(Being the basic Utilities expenses used for business are charged to profit and loss account)

Importance of Utilities Expenses

Utility expense plays the vital role as they are that expenses without which the basic business activities are not possible. The importance of utility expenses is explained as under:

  • Utility expenses are considered as the essential expenses which are necessary for smooth functioning.
  • They are charged as per the usage; less usage leads to minimum utility expenses.
  • The provider’s services are at minimal cost and with quality and assurance services like in the case of water. The authority charge for water takes the guarantee of providing clean water and chemical-free water so that it does not harm the users of the service.

Conclusion

Utility expenses are considered the expenses related to public utilities, i.e. public services necessary for running a business or household activities. In the case of household expense, it is defined as the type of expenses that are necessary for smooth living. The example of household utilities expenses includes the water expense, electricity expenses, gas expenses, maintenance expenses etc. and examples of commercial, i.e. business utilities expenses include repair cost of machinery, selling commission, basic packaging expenses etc. utility expenses are charged as per the usage and because of direct relation with the consumption the cost can be reduced as per the optimum utilization.

Recommended Articles

This is a guide to Utilities Expenses. Here we also discuss the definition and types of utilities expense along with examples and importance. You may also have a look at the following articles to learn more –

  1. Accrued Expenses
  2. SG & A Expenses
  3. List of Operating Expenses
  4. Non-Cash Expenses
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