Utilities payable debit or credit?
Is utilities payable debit or credit? Utilities payable is a current liability account that records the amount a company owes service providers for the various utilities that the company uses.
Usually, companies incur costs when they use electricity, water supply, internet connection, gas, telephone services, cable TV, etc. for every utility that a company uses, payments are usually made at the end of every month to the service providers in order to continue using the service and avoid being disconnected.
The amount that is due to be paid by the company to the various service providers is recorded as utilities payable since the company usually pays the bills for the utilities after they have used the particular service.
Companies cannot run efficiently without incurring costs for the utilities they use, hence understanding whether utilities payable is a debit or credit when recording such payments to be made to the service providers is important. Without a proper understanding of how to record the utilities payable as either debit or credit, the company’s accounting will be inaccurate, unbalanced, and sloppy. Here, we shall discuss utilities payable, debit, and credit. These will serve as a bedrock to our answering the question of whether utilities payable is a debit or credit.
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Utilities payable, debit and credit explained
Before answering whether utilities payable is a debit or credit, we need to first understand what each of these terms means.
Utilities payable
Utility payable is an account that reports the amount owed service providers by individuals, government parastatals, and individuals for the services received per month, quarterly or yearly; depending on the payment system. The monthly payment is however the most common. Utilities payable is a liability account that reports the amount due for utilities used per time. Before the utility bill is settled, the corporate organization that has used a utility will have to record the amount owed in their books of account. This is done in order to ensure that their financial records are up to date and that the balance sheet is in order.
Government, corporate organizations, and individuals all make use of one utility or the other on a daily basis. These utilities include internet, cable TV, water supply, electricity, gas, telephone, waste disposal, etc. If a company wants to identify the amount owed for the services received that are yet to be paid for, they use the utilities payable account to record such transactions. The amount owed to service providers that are recorded in the utilities payable account is a current liability since most of them are due for payment monthly. A current liability is a liability that has to be settled within a year.
Instead of using a separate account specifically for utilities that have been consumed but not yet paid for (utilities payable), most companies record the amount owed for utility consumption in the company’s accounts payable. The accounts payable is an account on a company’s balance sheet that tracks payments due to suppliers and service providers for goods or services that were received on credit. Hence it is said to contain all trade payables.
The utilities payable account should not be confused with the utilities expense account. The utilities payable account records the amount due for services that have not yet been paid while the utilities expense account records the amount spent on services received and whose payments have been settled. Therefore, all utilities payable balances become utilities expense balances once they are paid for. Hence the amount recorded for utilities payable is usually lower than that recorded for utilities expense since the utilities expense account tracks the accumulated payments made for utilities consumed.
Now that we have understood what the utilities payable represent, let us look at the meaning of debits and credits and how they affect the utilities payable.
Debit and credit journal entries for utilities payable
When companies want to record transactions that have occurred during the course of their daily business operations, they mostly do so using the double-entry accounting system. The double-entry accounting system makes use of debits and credits to record every transaction made. When using the double-entry accounting system, it is pertinent to understand how debits and credits affect the utilities payable account.
Debits and credits are used in the double-entry accounting system to ensure that companies adhere to the accounting equation where the total assets of a company are equal to the sum of its liabilities and equity. This is expressed using the accounting equation; Assets = Liabilities + Equity. When transactions are recorded, at least two accounts get affected; one with a credit and the other with a debit. For the utilities payable account, a debit decreases the account balance while a credit increases it.
When making journal entries for debits and credits, debits are usually recorded on the left column while credits are recorded on the right column. For every debit made to the utilities payable account, there must be an equal but opposite credit to another account. So also, when there is a credit to the utilities payable account, there must be an equal but opposite debit to another account. This equal but opposite entries ensure that the company’s accounts are balanced. It further shows the cash flow of the company tracking how monies are used up or generated.
When the utilities payable account is decreasing, another account is increasing. When the utilities payable account is increasing, another account will be decreasing. For example, a debit to the utilities expense will result in an equal but opposite credit to the cash account while a credit to the utilities payable will result in an equal but opposite debit to the utilities expense account. However, since most companies use the accounts payable to record utilities payable, a credit to accounts payable will be followed by an equal but opposite debit to the utility expense account. We shall further discuss the debits and credit journal entries for the utilities payable account later on.
Now that we have understood what utilities payable, debit and credit mean, we can then answer the question of whether utilities payable is a debit or credit.
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Is utilities payable a debit or credit?
When there is a credit to the utilities payable account, it means the company has incurred more payments owed to service providers for the utilities used. This credit will result in an increase in the amount recorded in the utilities payable account. Conversely, when the company pays part or all of the amount it owes service providers, the transaction will be recorded as a debit to the utilities payable account. This signifies a reduction in the amount owed to service providers by the company.
Recording utilities payable as debit or credit
Regardless of whether a company uses a manual ledger or software to record the utilities payable, understanding how to make the correct debit or credit entries is important. This is because inaccurate records of the utilities payable will ultimately affect the company’s overall financial records and reports. Usually, before payments are made for the utilities consumed per an accounting period, it needs to be recorded in the company’s ledger.
However, recording the utilities payable accurately is important to ensure the right financial records are kept because wrong records will result in payment defaults, and less or higher utility payments, and consequently, might result in the discontinuation of the service provided by the service providers. We shall therefore look at the various journal entries for utility payment here.
When using the double-entry accounting system, the payments due to service providers are recorded as a credit to the utilities payable account and a debit to the utility expense account. The journal entry would be
| Account | Debit | Credit |
|---|---|---|
| Utilities expense | $0 | |
| Utilities payable | $0 |
Since the company owes the service providers, the journal entry is a credit to the utilities payable account to record the increase in the amount owed. The debit to the utilities expense account also signifies an increase in the company’s expenses accrued for the accounting period.
When the utility bill owed is paid up, the transaction will involve a debit to the utilities payable to signify a decrease in the amount the company owes. Credit is made to cash to signify the decrease in the company’s cash. The journal entry to record this transaction will be:
| Account | Debit | Credit |
|---|---|---|
| Utilities payable | $0 | |
| Cash | $0 |
Let us look at some examples of how the utilities payable are practically recorded.
Example journal entries for utilities payable as debit and credit
For instance, if Alphabet consumes electricity worth $300,000 for the month of November and the payment for this utility is due for payment in December, the company will record it to the utilities payable account. This will signify that they owe the electricity distribution company $300,000 in electricity bills. The journal entry will be as follows:
| Account | Debit | Credit |
|---|---|---|
| Utility expense | $300,000 | |
| Utilities payable | $300,000 |
When Alphabet pays the bill in December, they will record the payment transaction as a debit to the accounts payable, and a credit is made to the cash account to indicate a reduction in the company’s cash as a result of the payment made. The journal entry will be as the one below:
| Account | Debit | Credit |
|---|---|---|
| Utilities payable | $300,000 | |
| Cash | $300,000 |
It is however important to note that most companies do not create a separate account for payments owed for utilities, instead, they lump the payments for utilities together with other payments owed to suppliers. Hence when there is an increase in the utilities payable account, it will be recorded as an increase in the accounts payable and when there is a decrease in the utilities payable, it is recorded as a decrease in the accounts payable.
Thus, when you look at the balance sheet of most companies, you will not find an entry for utilities payable in the current liability section, instead, you will see an entry for accounts payable. As such, the journal entries recorded above both before the payment made and after the payment is made will be recorded to the accounts payable as credit and debit respectively. The journal entries will be as shown below:
| Account | Debit | Credit |
|---|---|---|
| Utility expense | $300,000 | |
| Accounts payable | $300,000 |
| Account | Debit | Credit |
|---|---|---|
| Accounts payable | $300,000 | |
| Cash | $300,000 |
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