Accrual accounting is built on one principle: matching expenses to the period they relate to — not when the invoice is received. Utility expenses like electricity, gas, and water are classic examples where accruals are necessary, especially at period-end.
Because most companies will use some form of utility services during the year (see below for examples), utility accruals are commonly required at the accounting period end
What Is a Utility Accrual?
A utility accrual is an accounting adjustment made when a business has consumed utility services but hasn’t yet received the supplier invoice by period-end. To comply with the accruals concept a business should recognize:
- The expense in the profit and loss account in the correct accounting period
- The corresponding liability on the balance sheet (as an accrual)
Some common forms of utility services/expenses include:
- Water
- Gas
- Electricity
Why is a Utility Expense Accrual Needed?
Based on the common types of utility expenses listed out above – the typical reason an accrual is required at the year end is because these types of expenses are based on usage.
For instance, a business may use X litres of water in the final month of its accounting period but it will take some time for the water provider to calculate the exact amount used and therefore, there is a delay in them issuing the final invoice to the business.
This timing difference between water usage and the invoice being issued to the business creates the need for an accrual to be put in to place.
What are the Journal Entries required for Utility Expense Accruals
The journal entry for a utility expense is as follows:
- Dr Utility Expense (profit and loss account)
- Cr Accruals (balance sheet)
Further down in this article we will provide a full detailed example, including numbers for your reference.
What Journal Entry Should be Posted When the Utility Invoice is Received?
The above journal entry ensures that the expense has been recorded in the correct period. Therefore, when the purchase invoice arrives post year end – there should be no further impact to the profit and loss expense account.
Instead – the accruals should be reversed and instead, recognised within trade payables/creditors. The journal entry required to do this is as follows:
- Dr Accruals (balance sheet)
- Cr Trade Payables/Creditors (balance sheet)
As explained – the above journal has a balance sheet impact. This ensures that there is no further change to the profit and loss expense, because it was already recognised last year (the period in which the expenses was incurred).
Utility Expense Journal Entry Example
Lets imagine a business, ABC Ltd, a company with a warehouse that uses electricity throughout the year.
The electricity provider issues invoices for the previous month’s electricity usage 1 week following each month end. Therefore in the final month of the year-end December, ABC Ltd will use electricity but will only receive the invoice in January. As such, a utility (electricity) expense must be recognised at the year end in order to record the expense and corresponding liability, even though the invoice has not been received yet.
Steps taken:
- ABC Ltd must estimate the expense to recognise – this should be based on estimated usage. This may be based on typical monthly usage or ABC may have electricity usage statistics that it can use to make this estimate. Later we will provide some examples on how companies can make this estimate. For now, ABC Ltd has estimated is December electricity usage to be £1,000
- Post the journal entry to recognise the utility expense accrual
Initial Accrual Entry (at period-end):
- Dr Electricity Expense £1,000 (P&L)
- Cr Accruals £1,000 (Balance Sheet)
This ensures the utility expense hits the profit and loss account in December and the liability is shown as money owed on the balance sheet.
When the Final Invoice Arrives
When the electricity supplier eventually sends the invoice in January, ABC Ltd will reclass the accrua to trade payables — no impact to profit and loss because the expense has already been recognized.
- Dr Accruals £1,000 (Balance Sheet)
- Cr Trade Payables £1,000 (Balance sheet)
How to Estimate the Amount of the Accrual?
A utility expense can sometimes cause difficulty for accountants because it is typically based on estimated usage.For instance, a company does not typically issue a purchase order for its electricity usage and therefore the final expense amount will be known when the electricity provider issues the final invoice.
To determine the accrual amount, companies typically estimate based on past usage patterns and current utility rates. For example, if the electricity meter is read quarterly but accounts are prepared monthly, the business may calculate the expected charge by averaging the prior bills or applying a daily rate to the number of unbilled days.
Some companies also receive pro-rated estimates from the utility provider, which can be used to support the accrual. The key is that the amount must be reasonable and supportable — enough to reflect the expense that has been incurred but not yet invoiced.
Utility providers can often provide guidance on how to make such estimates – some useful guidance can be found here:
Gas Usage: https://www.britishgas.co.uk/business/blog/how-to-read-your-business-gas-meter
Electricity Usage: https://www.eonnext.com/help/metering
Water usage: https://www.unitedutilities.com/my-account/your-bill/understanding-your-bill/metered-customers/
Summary
To summarise, utility accruals are typically based on estimated usage and must be recognised at the year end, because utility invoices are typically. By putting a utility expense accrual in place, the profit and loss expense and balance sheet liability are accurate at the year end, even though the invoice is not yet received.