“Telephone Expense” refers to the cost incurred by an individual or a business for using telephone services. This expense category includes the cost of landline services, mobile phone services, and other related costs such as long-distance calls, monthly subscription fees, installation and maintenance costs, and even internet services if they are bundled with phone services. For businesses, telephone expenses are typically considered an operating expense.
In financial accounting, telephone expenses are typically reported on the income statement during the period in which they are incurred. If the business pays for future telephone services in advance, that portion might be classified as a prepaid expense on the balance sheet, and then it would be expensed on the income statement over the period the services are used.
For example, if a company pays for a one-year phone service contract upfront, it would record the entire amount as a prepaid expense initially. Then, each month, one-twelfth of that prepaid amount would be moved to the telephone expense category on the income statement, reducing the prepaid amount on the balance sheet correspondingly.
Example of Telephone Expense
Let’s delve into a simple example illustrating how “Telephone Expense” might be accounted for in a business context.
Imagine a small business called “EcoBoutique” which sells sustainable and eco-friendly products. EcoBoutique has both a landline for its storefront and mobile phones for its sales representatives who are often on the road.
Details for the month of January:
- Landline bill for January: $150
- Mobile phone bills for three sales representatives: $80 each
- On January 15th, EcoBoutique paid $1,200 for a one-year premium package deal that includes advanced call features for their landline, working out to $100/month.
Accounting for Telephone Expense:
- January Landline Cost: $150 (this is straightforward and is directly expensed)
- Mobile Phone Costs: 3 reps × $80 = $240
- Premium Package: As this is a prepaid expense for the year, the initial accounting entry in January would debit “Prepaid Telephone Expenses” for $1,200 and credit “Cash” or “Bank” for the same amount. However, for January’s actual telephone expense, only one month’s worth of the service, or $100, will be expensed. The entry would debit “Telephone Expense” for $100 and credit “Prepaid Telephone Expenses” for $100.
Total Telephone Expense for January:
= Landline Cost + Mobile Phone Costs + One month of Premium Package
= $150 + $240 + $100 = $490
So, for the month of January, EcoBoutique would report a “Telephone Expense” of $490 on its income statement. On the balance sheet, the “Prepaid Telephone Expenses” would now be $1,100 (initially $1,200 minus the $100 expensed in January).