How to accrue for and record utility expenses

2.1. Wait until actual utility bills are received to calculate the accrual amoun

If Company ABC does not close March books until the end of April, then it is possible to wait until the March-April utility bills are received. The bills will show the exact utility expenses. In cases where utility services are provided evenly throughout a month (i.e. same amount each calendar day), Company ABC can calculate the expenses for the 11 days in March by taking the total expenses from March-April bills, divide it by the number of days covered by the bill (31 days) and multiply the result by 11 days in March.

For example, if Company ABC received three utility bills (gas, electricity, water) for the period from March 21 to April 20 (31 days) totaling $31,000, the expense accrual for the 11 days would be calculated as follows:

March Accrual = 

March-April Bills

 x 11 days

31 days


March Accrual = 

$31,000

 x 11 days = $11,000

31 days

The $11,000 is the utility expenses incurred and unpaid at March 31 or to be more exact the expenses from March 21 to March 31.

This method provides a more precise calculation of the accrued expenses. At the same time, this method has one disadvantage: it requires keeping the books open until utility bills are received, which is not a good practice and is not always possible. Thus, let's look at another option described further.

2.2. Use past utility bills to calculate the accrual amount

Another method is to use historical information about utility expenses to estimate the expense accrual at a month end.

Now suppose Company ABC closes a month within the first business week after month end or by April 7 in our example. March-April utility bills will not be available until after the month is closed. In this case, Company ABC can look back at history of monthly utility expenses and use that in their accrual calculation.

Assume that the monthly utility expenses for the previous six (can be more or fewer months, apply judgment) months was $32,000. That was determined by summing utility bills for the last six months and dividing the result by six. As long as the utility consumption is consistent from period to period, it's safe to assume that the utility bills for March-April will total around $32,000. Using this monthly expense and the formula above, the utility expense accrual as of March 31 (for the 11 days) can be determined as follows:

March Accrual = 

$32,000

 x 11 days = $11,355 *

31 days

(*) rounded

We deliberately used $32,000 of expenses in this method calculation to show that the estimated amount may be different from the $31,000 of actual bills noted in the first method calculation. Accruals are estimates by their nature, so some differences between the accruals and actual amounts are expected. However, the point to consider is that such estimates should not be materially different from the actual amounts.

Note that we assumed the utility expense from month to month is consistent. In cases where there is seasonality in the business and such expenses, this fact should be incorporated into the accrual calculation (by adjusting the accrual to reflect at what point within a season pick or slow down the company is).

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