Utility Bill Received, Payable Next Month
Accrual Accounting Concept
Under the accrual basis, expenses must be recognized when incurred, not when cash is paid.
When a company receives a utility bill (electricity, water, gas, etc.) but will pay it next month, the expense has already been consumed. Therefore:
- Utility Expense must be recorded now
- Accounts Payable is used to recognize the obligation to pay in the future
This is called an accrued expense or accrued liability.
Why It Matters
Recording the expense immediately ensures:
- Expenses are matched to the correct accounting period
- Liabilities reflect amounts owed to suppliers
- Profit is not overstated for the current period
Accounts Involved
1. Utility Expense (Debit)
- Income statement account
- Recognizes the cost of electricity/water/gas consumed
2. Accounts Payable (Credit)
- Liability account
- Indicates the amount owed to the utility company
General Journal Entry
Debit: Utility Expense
Credit: Accounts Payable
This entry records the expense and acknowledges the liability.
2. Practical Example: Accrued Utility Bill
Scenario
A company receives an electricity bill for RM1,200 for the month of June, but payment will be made in July.
The expense belongs to June because that is when the electricity was consumed.
Journal Entry (When Bill Is Received)
Debit: Utilities Expense RM1,200
Credit: Accounts Payable RM1,200
This records the expense and sets up the liability.
Balance Sheet Impact
- Liabilities increase (Accounts Payable +RM1,200)
- Equity decreases (because expense reduces net income)
Income Statement Impact
- Utility Expense RM1,200 is recognized for the month
Journal Entry (When Payment Is Made Next Month)
When the company pays the bill in July:
Debit: Accounts Payable RM1,200
Credit: Cash/Bank RM1,200
This clears the liability and records cash outflow.
Summary Table
| Event | Debit | Credit |
|---|---|---|
| Receive bill (accrue expense) | Utility Expense | Accounts Payable |
| Pay the bill next month | Accounts Payable | Cash |