Are Utilities Accounts Payable?
There are often questions that small business owners have regarding specifically accounting and various financial terms. A typical query is, can expenses such as electricity bills, gas bills, water bills, and others be treated as accounts payable? The knowledge of distinguishing whether utilities are accounts payable or not is relevant for business owners to categorize these costs in their accounting records. In this article, we will explain how utilities can be defined when it comes to financial reporting and what their role is in this process.
What are Accounts Payable?
First of all, one should understand what it means when the term accounts payable is used. Accounts payable is a current liability account that reflects the amounts due to the business’s vendors and suppliers for products and/or services received and not yet paid for.
Common examples of accounts payable expenses include:
- Staples and stationery many types of inventory and office supplies are available to companies and these include.
- This sector involves the procurement of basic materials that are used to produce finished products.
- Fixture, equipment, or any other property of the business.
- Accommodation, Professional and Contracted Services
Accounts payable figures as a liability on the balance sheet given that it depicts short-term debts that are due. As vendors issue invoices, the business has a liability that will be payable in the future. This account balance increases over time as more items are bought on credit. This is when the company makes payments to the vendors’ invoices which decreases the total A/P amount.
Accounts payable is an important aspect of many businesses and thus has several characteristics as explained below.
Two key characteristics define what types of expenses count as true accounts payable:
1. The buyer signs a contract or there is an implied contract and credit transaction with the vendor of the goods or services. This means that the firm has an established trade account and there is a business agreement that has been made where the payment is expected after delivery rather than making cash payments upfront.
2. The accounts payable liabilities are short-term or current debts as distinguished from long-term financing or borrowing agreements that require more than one or two months to be settled.
Are Utilities Accounts Payable?
With this background, are items such as water, electricity, gas, telecommunication costs, and other utilities that are incurred every month included in accounts payable for business?
The answer is generally no. While utilities represent ongoing business expenses, they don't meet the technical definition to be classified as accounts payable for a few reasons:
- There are normally no credit sales for utilities where consumers are expected to pay immediately after usage of the utilities. Generally, most bills for the utilities are paid within the month the expenses are incurred.
- Utilities are operational costs and not inventories that help in generating assets needed and used in production or business. This goes against accounts payable, which it is a process of procuring tangible products or contracted services.
- Utilities do not have structures that include trade accounts and credit with the sellers in the ordinary procurement management. It is just contributing to the monthly subscription and getting a service that is known by everyone.
For these reasons, utility bills are not like any other account, which is recorded in accounts payable sub-ledger like inventory purchases or a supplier invoice. Instead, items such as power, light, water, gas, telephone/internet, and garbage disposal come under a more generalized category of overhead operating expenses. These are usually priced as general overhead costs when they are hired out for a particular project.
It is important to understand the proper accounting treatment of utilities as this topic can be complex to follow.
It is important to note that utility bills can be monthly, bi-monthly, or even quarterly based on the company’s nature of service delivery.
Here are some tips on properly recording utility expenses:
- The costs of utilities should be adjusted and recorded in the right accounting period when the expenses are being incurred, not the time when payment was made. This is good as it matches the revenue and the expenses in the right manner.
- If a utility bill addresses charges in different periods, then the bill should be divided and distributed between the correct fiscal months or quarters.
- If a utility bill has not been received, then the business has to make a guess and accrue for it in the right period. When a true invoice comes much later, balance it.
- Certain utility costs may be combined between facilities’ general and administrative expenses compared to costs directly related to production or operations varying with the business type and industry. It is crucial for cost accounting that assignments be allocated correctly within the department.
Managing Utility Expenses
While utilities are not technically accounts payable, their costs still require careful oversight and management like other business expenses:
- When choosing utility providers, look for companies that offer competitive rates and avoid providers that show a tendency for rate hiking regularly. This could point to such matters as leaks, metering malfunctions, or any other anomalies that require fixes.
- Identify reference rates that exist for average energy usage per area or product or service provided. A comparison of the use to the baseline industry data as well as prior periods will help in identifying abnormal usage.
- particularly for manufacturing industries, conservation initiatives for energy, which is often a major overhead cost, are highly effective at reducing waste.
- Purchase utilities with other companies at a lower rate in a deregulated area when the contract expires. This can eventually cut down these expenses in the long run.
The Bottom Line
Electricity, gas, water, telecom, and other expenses that relate to the utility bills expensed in the business do not fit in the meaning of trade accounts payable. However, since they are operating costs, their costs and payments must also be properly controlled and monitored. Any business needs to be careful when it comes to managing costs in areas such as utilities and facilities since it can have a positive impact in the long run. It also enhances the accurate reporting of all overhead expenses which are critical in evaluating operating profit margins from one period to another.