How do we account for utility bills in our business accounts?

A common error we see in small business accounts is in the posting of payments on account with the utilities company.

Say you pay monthly direct debits on account towards your utility bills, the transaction history for a typical quarter may look like this:


It is tempting to post the value of your Direct Debit to your accounts as the electricity cost, but that is not correct when you are accounting on an accruals basis – you could be under/over accounting for costs and and potentially under/over claiming for VAT on your purchases.

So how should we post utility bills when the balance never seems to clear, and you are almost always left with a balance in debit or credit at the end of each quarter?

1) If you receive quarterly bills from your utility company, your bill should confirm;

a) the utility charge for the period and the payments made on account,



a) the carried forward balance in your utility account:

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2) The actual charge including VAT is the amount to be charged to your electricity account. (if you are accrual accounting in your business, you would have accrued the cost in your management accounts).  If you are VAT registered – the VAT invoice allows you to recover the VAT charged to you by the utility company.

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3) The invoice has been part paid by three instalments paid on account. If you were reconciling these transactions at the end of the billing quarter, then you would be able to find and match them against the utility bill as shown, however, as these direct debits  are being collected in advance of the invoice being issued – this is not possible. We could leave the direct debits as uncleared transactions and match against quarterly bill when it comes in later….. this method is a little bit lazy and not really the correct way to post the transaction. Or we could…

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4) post the direct debits as a spend money transaction, and post as overpayments on the suppliers account. This keeps the bank account reconciled and the suppliers account up to date. Choose the spend money option as shown…

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5) Click on the option to spend the money as an ‘Overpayment’

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6) Take care to post the payment as an overpayment on the correct supplier account. (Watch out for the Direct Debit being collected under a shortened name on the bank statement which could inadvertently create a second supplier account.

We recommend deleting the contents of the To: field, and keying in the account name to be sure the payment gets allocated to the correct account.

Save the transaction.

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7) And reconcile the transaction.

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8) When the invoice is posted you should be prompted to net this off against the payments that have been posted on account. You can match the transactions when you post the invoice or you can allocate the overpayments manually – which is what we will do here to show you how the account works.

Find the supplier account in the contacts menu.

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9) Here you can see that the outstanding balance on the account matches the carried forward statement balance but it looks like there is an overdue balance of £2095.32 which can’t be right as we have been making payments on account.

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10) If we drill into the account, we can see the payments on account and the invoice issued on the 22 August. Now we need to allocate the overpayments to the account against the invoice.

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11) Click on overpayment to allocate the credit.

To save time you can right-click on each credit and open each one in a separate tab

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12) Allocate the credit in each open tab, save and then close each tab and refresh the account summary to show the updates.

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13) Your credits should now be allocated and the carried forward balance should match the carried forward balance on your utilities statement.

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Utility companies may not always show a balance owing to them, but often a Credit balance owing to you: This is important because if you change provider or your contract is ended you should be entitled to reclaim the balance. Posting the transactions this way will highlight whether you have overpaid or are still due a payment – or if you are missing any bills or credit notes.


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