Managing debt and expense levels are two crucial aspects of managing cash flow and maximizing profitability.
To do this, it’s best to start with looking at the recurring costs a business faces. And one recurring cost almost every business has is utilities.
When utilities are billed to be paid at a later date, they’re recorded as utilities payable. If you want to have a real impact on your cash flow and profit levels, you’ll want to know how to manage them effectively and we have the essentials you need.
What is utilities payable?
Utilities payables are the costs accrued due to the usage of a utility such as electricity, water, or heating.
In the accrual basis accounting methodology, costs are recorded as they are incurred. What this means for utilities is that the costs of using a utility are recorded as they are used or when billed.
If the utilities are billed monthly, the amount recorded can be taken directly from the bill. However, if a business hasn’t received a bill for a given month, it’s their responsibility to record an estimate of the amount owed based on their usage until the bill is received.
The amount owed is recorded as a liability on the balance sheet. When a payment is made, the balance decreases.
For example, if a business uses $100 of electricity in a month, $100 of utilities payable is recorded in that month and $100 is left owing. Once the business pays the $100 outstanding, the balance decreases by that amount.
Utilities payable helps businesses plan for what they owe and is an essential part of cash flow management.
What is utilities payable in cash basis accounting?
In cash basis accounting, expenses are recorded only when money changes hands. The business would not track their outstanding bills on their balance sheet, instead only recording the expense on the income statement when the bill is paid.
As a result, there is no utilities payable in cash basis accounting, just as there’s no accounts payable. There is only the utilities expense ledger on the income statement with transactions recorded when the bill is paid.
What type of account is utilities payable?
The utilities payable is a liability account in the general ledger. This means it’s found in the liabilities section of a balance sheet.
More specifically, utilities payable is treated as a current liability. Current liabilities are short-term debts that are to be paid within one year.
Some businesses treat utilities payable as its own account, while others treat it as a sub-account nested under accounts payable.
Liabilities accounts increase then they are credited and decrease when debited. With that covered, let’s get into how utilities payable are recorded and what transactions you need to enter.
Recording utilities payable
Generally speaking, there are two transaction types recorded in the utilities payable ledger: the billing and the payment.
Recording a utilities bill
When utilities bill is received, the transaction is recorded on the billing date. The two ledgers used in recording the bill transaction are utilities payable (a liability on the balance sheet) and utilities expense (an expense on the income statement).
The journal entry looks like this:
The billing amount is the amount charged on the invoice and the bill date is the date on the bill itself.
The credit to utilities payable increases the liabilities ledger balance showing an amount owed. The debit to utilities expense increases the expense ledger balance showing that utilities expenses occurred in the month.
Recording a utilities bill payment
The payment of a utilities bill is recorded once the payment clears. The two ledgers used in the payment transaction are utilities payable and the bank account or alternative account the payment came from.
The journal entry looks like this:
The payment amount is the amount paid to the utilities provider and the payment date is the date the payment is recorded in the bank account (check the bank statement to confirm).
The debit to utilities payable decreases the balance and the balance remaining should reflect what is still owed. The credit to the bank account (an asset) decreases the balance to show the money flowing from the account.
Utilities Payable vs. Utilities Expense
A business using the accrual method of account has both a utilities payable ledger and a utilities expense ledger. So what’s the difference?
Utilities payable is a liability account that exists on the balance sheet. The balance of utilities payable indicates how much is owed to utilities at a point in time. For example, if you look at a balance sheet dated January 31st that shows $1,000, that’s the amount left owing as of that date.
Utilities expense is an expense account that exists on the income statement. The balance of utilities expense shows how much of the expense was accrued in a given period of time. For example, looking at an income statement for the month of January with a balance of $1,000 means $1,000 of utilities expenses accrued in the month.
While the utilities payable account will go up and down as bills are received and payments are made, the utilities expense account will only increase unless there is an amendment to the billed amount (e.g. a utilities company providing a credit after decreasing the billed amount by $10).
See our table below for a simplified breakdown of the differences.
Managing Utilities Payable
Utilities payables play a central role in a business’s budgeting, cash flow management, and workflows. Here are some best practices you should follow based on which part of the business it impacts.
Reporting and budgeting utilities payables
Reporting and budgeting go hand-in-hand: reporting creates historical data that’s used to create forecasts and cost estimates used in budgeting.
To get the most out of your reporting, you should:
- Analyze and plan for seasonal variations: Look for periods of peak consumption where costs are typically higher than usual.
- Look for long-term trends: Use visualizations and data to identify whether utility costs are increasing, decreasing, or holding steady over time.
- Use forecasts for cost estimates: Creating cost estimates helps businesses budget for upcoming expenses so they’re never struggling to make a payment.
- Monitor usage within billing periods: At any point in the billing period, checking the current usage level indicates what the billed amount will be.
Managing utilities payable payments
All utilities payable must be paid at some point, but when and how you make those payments will improve the overall experience.
Some utilities payments best practices to follow are:
- Use a single business account for payments: By keeping payments in a single account, you’ll have a complete history of utilities payments in a single place.
- Know your payment terms and due dates: Set reminders for upcoming due dates, but also take full advantage of the payment terms so money only goes out when it’s convenient for the business.
- Time payments with cash inflows: Schedule payments so they go out after a period of cash inflows, ensuring there’s enough cash on hand.
- Stagger utilities payments when possible: Rather than a lump sum leaving the business at one point in time, spreading payments for different utilities throughout the month minimizes the impact on your cash reserves.
Leveraging software and technology in utilities payables
Gone are the days of paper bills stored in a filing cabinet. Advancements in accounting software and tech solutions smoothen the utilities payables workflow to minimize both effort and errors.
Follow these tips to maximize the efficiency of your utilities payables workflows:
- Take advantage of automatic payments: Never miss a due date or take up precious time filling out payment details by using automated payments when offered.
- Store statements securely: Whether it’s a paper or digital copy, all statements should be kept in a safe place for easy reference. Consider scanning physical statements to move all documents onto the cloud.
- Use a bill payment platform: Streamline the experience from receiving an invoice to rendering a payment and updating reports with a bill payment platform (like us).
How to streamline utilities payables and other invoices
Receiving and paying bills is inevitable, but how you deal with them is open to different approaches. The approach you choose can help save you time and effort while giving you valuable insights that inform your decision-making.
Enter BILL, an accounts payable platform that streamlines workflows and simplifies payments to a single click. Automated bill entry turns invoices into actionable transactions meaning the AP process begins without lifting a finger.
Book a demo to see how BILL helps businesses automate their accounts payable processes.
