Accounting for Unpaid Utility Bills: A Guide for Businesses

Utility costs like electricity, gas, water, and waste services are a normal operating expense for companies. But what is the proper accounting treatment when you receive a utility bill but cannot or will not pay it right away?

Below we explain the accounting methods, journal entries, and controls businesses should use to handle unpaid utility bills correctly on their books.

Overview of Accounting for Unpaid Utility Expenses

When a utility bill is received but not immediately paid, businesses should:

• Recognize the unpaid bill as an expense and liability.

• Record it in the accounting records through a journal entry.

• Keep track of unpaid bills in accounts payable

• Eventually settle the liability when payment is made.

• Maintain controls to prevent late fees or service disruptions.

Proper accounting procedures for unpaid utilities help ensure expenses and liabilities are reflected accurately.

When to Debit Utilities Expense and Credit Accounts Payable

When a utility bill is received, debit Utilities Expense and credit Accounts Payable. This records the obligation even though cash payment has not yet occurred.

Specifically. debit Utilities Expense and credit Accounts Payable when

• A utility bill for services already received arrives.

• The business will not pay the bill immediately upon receipt.

• The business intends to pay the amount owed in the future.

• The utilities expense relates to services like electricity gas, water, etc.

This entry increases expenses, increasing liabilities, but does not impact cash until the actual bill payment happens.

Why Record Unpaid Utility Bills This Way

Recording unpaid utility bills as expense and liability is correct because:

• The utilities service has already been received and used.

• The expense has been incurred even if not yet paid.

• The business owes payment, creating a liability.

• True expenses and total liabilities are reflected.

• Matches the expense of utilities to the period of use.

• Avoids underreporting expenses or liabilities.

Recording the journal entry upon receipt provides accurate financial reporting. Cash flow timing does not determine when expenses and liabilities occur.

Examples of Expense and Liability Journal Entries

Here are some examples of the debit and credit journal entries to record unpaid utility bills:

• Debit Utilities Expense, Credit Accounts Payable:

  • Electricity Bill Received $1,000, Not Paid Immediately

• Debit Office Rent Expense, Credit Accounts Payable:

  • Received Monthly Office Lease Bill for $5,000, Paying Next Week

• Debit Utilities Expense, Credit Accounts Payable:

  • Water Bill Due on 25th Received Today for $650, Will Pay on 27th

The accounts debited depends on the type of utilities services received. The credit is always to accounts payable.

When to Record the Cash Payment for the Utility Bill

The unpaid utility bill sitting in accounts payable does not impact cash until the business actually pays it. When payment is made, debit Accounts Payable and credit Cash.

Specifically, make this cash payment entry when:

• The company issues payment by check, bank transfer, etc.

• Accounts payable is reduced directly with cash.

• Settlement of the outstanding liability occurs.

• Payment is made to the utility company.

The cash payment reduces the open accounts payable balance.

Real World Example of the Cash Payment Journal Entry

Here is how the cash payment journal entry would look:

• Debit Accounts Payable, Credit Cash:
  • Paid $1,000 Electricity Bill on Account Today

When accounts payable is debited, the liability is removed from the books because cash was paid.

Why Recording Cash Payment is Important

It is important to record the actual cash utility payment because:

• Cash itself has left the company’s control.

• The liability no longer exists.

• Expenses stay matched with payment in the same period.

• Reduces accounts payable balance showing less creditor obligations.

• Documents correct timing of actual cash flows for analysis.

Proper cash payment journal entries keep books up-to-date.

Maintaining an Aged Accounts Payable Ledger

A company should maintain a ledger with an aged schedule of unpaid utility bills and other accounts payable. This schedule tracks:

• Payables by due date like 0-30 days, 30-60 days, 60+ days.

• Which utility bills have been recorded but not yet paid.

• The total outstanding accounts payable balance.

• Which payables are current versus past due.

The aged payable schedule ensures proper cash management, payment prioritization, and cost controls. It provides the details behind the accounts payable general ledger account balance.

Implementing Controls Around Utility Payments

Along with correct journal entries, companies should institute controls around utility bill payment processing:

• Centralize utility payment procedures into an accounts payable department.

• Ensure timely recording as soon as bills arrive.

• Set electronic reminders when utility payments are due.

• Require secondary approval for high dollar utility payments.

• Watch for early payment discounts to take advantage of.

• Review aged schedule weekly to prioritize payments.

• Monitor average time to utility payment.

Controls create accountability, consistency, reduce late fees, and optimize cash management around AP.

How ERP Software Handles Utility Bill Accounting

Enterprise resource planning (ERP) software can automate the recording of utility expenses and payment liability as bills arrive. Benefits of utility bill accounting integration with ERP include:

• Electronic data interchange with utility companies.

• Automatic creation of payables upon billing.

• Email alerts on upcoming due dates.

• Improved cash forecasting accuracy.

• Straight-through payment processing.

• Maintained aged payables ledger.

ERP automation provides efficiency, speed, accuracy, and controls around utility bill accounting.

The Importance of Proper Utility Accounting

While recording unpaid utility bills may seem like a straightforward accounts payable transaction, following proper accounting methods is vital for:

• Accurate financial statements reflecting true expenses and liabilities.

• Tighter cash management and cash flow analysis.

• Preventing unnecessary late fees and outages.

• Tracking and managing utility consumption and costs.

• Optimized vendor and AP payment processing.

Correct journal entry procedures for utility bills received but not yet paid provide significant benefits to overall accounting quality and business efficiency.

Key Takeaways on Unpaid Utility Bill Accounting

Key points to remember:

• Expense and liability upon bill receipt

• Then cash payment reduces accounts payable

• Maintain an aged payable schedule

• Implement controls for proper tracking and payment

• Leverage automation like ERP integration

Accurately recording unpaid utilities provides better financial oversight and cost control for any business.