Utilities expenses: Definition, types, best practices

As a good business leader, you’ve been spending some time going through your company’s financial statements.

On the income statement, you see that your “utilities expense” is eating up a fair bit of your profit.

What exactly does that expense represent, and are there any ways in which you can lower it to improve profitability?

In this article, we’ll explain what the utilities expense is, common types that businesses incur, how to classify and treat them from an accounting standpoint, and best practices for managing utility expenses.

What are utilities expenses?

Utilities expense represents the cost of essential services—such as electricity, water, gas, and internet—required to keep a business running. It’s a recurring operating expense that varies with usage and is reported on the income statement.

Depending on your accounting setup, they may also cover services like waste management, recycling, internet, phone, and cable.

Examples of common utilities

The kinds of utility expenses your business incurs depend on the nature of the organization, such as whether you have a physical office or work virtually, or if you manufacture a product or sell a service.

Common categories include:

• Electricity: Power for lighting, equipment, computers, and HVAC systems.
• Gas: Used for heating, water boilers, or manufacturing processes in some industrial settings.
• Water and sewerage: Covers the cost of water usage and disposal, consumed in bathrooms, kitchens, and goods production
• Trash and recycling: Fees for waste collection and recycling services, typically incurred by offices, retail stores, and restaurants.
• Internet and phone: Broadband, VoIP systems, business landlines, and mobile. These are sometimes categorized as communication expenses rather than utilities.
• Cable or streamlining services: Occasionally relevant for certain businesses that have waiting rooms, or in hospitality scenarios.

Side note: Some businesses may also include security system subscriptions or cloud-based infrastructure under utilities, depending on internal accounting practices.

Importance of tracking utility expenses 

Why invest in getting on top of utility expenses?

Accurately tracking this expense category:

• Improves budgeting and forecasting, helping you anticipate seasonal spikes and more effectively allocate budgets
• Identifies inefficiencies such as leaks, equipment issues, or areas where energy-saving measures could cut costs
• Supports cost control by increasing your ability to pinpoint and reduce unnecessary spending by location, department, or equipment 
• Enables accurate reporting, allowing you to produce financial statements and manage reimbursements, ensure utilities are categorized and recorded correctly 
• Strengthens sustainability efforts by quantifying resource consumption, helping you set, measure, and achieve environmental goals

Classifications of utilities expenses 

The different utility expenses a business incurs can be categorized under different categories, depending on how and where the utilities are used within that organization.

Common classifications include:

• Operating expenses: Most utility costs (like electricity, water, and internet) are considered operating expenses.
• Administrative expenses: Utilities that serve broad and general business functions (like lighting or HVAC) are sometimes recorded as admin expenses.
• Manufacturing expenses: In a production setting, utilities that are required for machinery, lighting, and facility maintenance within the factory itself are often treated as part of manufacturing overhead.
• Selling expenses: If utilities go directly into sales operations (like electricity in a retail store or internet in an outbound call center), they can be categorized under selling expenses.

How utilities are classified depends on their direct connection to each business activity. Clear categorization helps improve financial analysis, cost tracking, and reporting accuracy.

Accounting for utilities expense 

Utility expenses are recorded as journal entries, either when the bill is received or when it is paid, depending on the accounting method used (more on that shortly).

A standard entry for a utilities expense would look like this:

• Debit: Utilities Expense
• Credit: Accounts Payable or Utilities Payable (if not yet paid) or Cash (if paid immediately)

Businesses may also allocate utility costs across departments, locations, or projects to track usage more precisely.

Accrual basis of accounting for utilities expenses 

If a business is operating using the accrual basis, it records utilities expenses when the services are used, not when they are paid.

Cash basis of accounting for utilities expenses

Conversely, when a business uses the cash accounting basis, it records expenses only when payment is made for the services rendered.

Impact on financial statements

Utilities expenses have a direct impact on all three of the principal financial statements:

1. On the income statement, utilities expenses appear as part of operating expenses, reducing net income.
2. On the balance sheet, if unpaid, the expense is recorded as a liability under accounts payable.
3. On the cash flow statement, payments for utilities show up as operating cash outflows.

Utilities expense best practices 

Here’s how to stay on top of business expenditure on utilities and even bring total spending down.

1. Monitor usage consistently

Tracking expenses is step one.

By regularly monitoring expenditure, you’ll stay ahead of cost spikes and be able to identify patterns that might signal inefficiencies.

Tools to implement here include:

• Smart meters
• Accounting platforms with expense tagging
• Utility management tools

Be sure to gather data by site, department, and time to enable deeper analysis. This level of granularity supports both immediate troubleshooting and long-term planning.

2. Compare actuals to forecasts

Utilities should be treated just like any other recurring business cost. Set a budget for them, then compare your projections to actual spending.

Look at past seasonal trends, adjust for planned growth or operational changes, and build in contingencies for fluctuations. This helps avoid budget overruns and improves overall cost predictability.

3. Automate payments and reporting

Missed or late payments can lead to penalties or service disruptions, both of which end up increasing your overall utility expenses.

Use automation tools to help schedule payments and generate monthly reports. They make it much easier for you to stay compliant, meet payment obligations on time, take advantage of early payment discounts, and reduce your total admin overhead.

Some platforms also help you allocate utility costs to the correct departments or cost centers for cleaner books.

4. Make energy-efficient upgrades

One of the best ways to reduce your spending on utilities is to invest in upgrades that reduce long-term consumption, such as:

• LED lighting
• Energy-efficient HVAC systems
• Low-flow plumbing

Even smaller actions (like setting thermostats on timers or powering down unused equipment) can yield measurable savings. These changes improve both cost control and sustainability performance.

5. Adjust operations to reduce peak demand

Utility rates often vary based on time of use.

Analyze your statements to determine when and where that’s the case. Then, shift high-consumption activities (for instance, heavy equipment or machinery usage, or batch processing) outside of peak cost hours, helping you reduce rates.

In multi-site operations, load balancing across locations may also help flatten demand and reduce cost volatility.

6. Get your tax treatment right

Utilities are generally deductible as operating expenses, but partial personal use (such as a home office setup) must be accounted for.

Work with your accountant to ensure costs are properly classified and deductions are compliant. Keeping clear records also helps during audits or end-of-year reconciliations.

Stay on top of utilities expenses with automation 

If you’re committed to monitoring and even reducing your utility expense, the first step you’ll want to take is to integrate a spend management system to track expenses and identify areas for cost reduction.

With BILL, you can:

• Monitor expenditure in real-time
• Access business credit to fuel business growth
• Analyze spending by period, department, or category 
• Manage employee reimbursement 

Discover BILL’s expense management software today.