Question

On january 31, jean consulting company receives a bill for that month’s utilities in the amount of $500. jean sets it aside because she does not plan to pay the bill until its due date of february 15. what effect, if any, does this event have on the company’s accounting equation as of january 31?

Answer 1

When a company obtains a utility bill but will not pay it right away, it should debit utilities expense and credit accounts payable.

Explanation:

Debit utilities expense - the business has received a utilities bill and this is documented as an expense in the income statement.

Credit accounts payable - The credit entry signifies the liability to pay the supplier in the later date for the use of the utilities.

The accounting equation, Assets = Liabilities + Owners Equity means that the total assets of the business are all the time equal to the total liabilities plus the total equity of the business. This is true at any time and applies to each matter. 

In this case the balance sheet liabilities (accounts payable) have been increased by 500, and the income statement has a utilities expense of 500. The expense decreases the net income, retained earnings, and therefore owners’ equity in the business.