Deferred Expenses

Definition of Deferred Expenses

The expense which reaps benefit to the organization for more than a year is termed a deferred expense, and it is shown under the non-current asset in the balance sheet and to be amortized on a systematic basis; in other words, it is the type of advance payment of the expense which gives benefit in future years.

The following article provides an outline for deferred expenses.

Explanation

Business organization incurs a lot of expenses. Some expenses are recurring in nature, and some are capital in nature. Some expenses are recurring or capital, like share issue expenses, loan commitment charges, debenture or bond issue expenses, etc. This expense type is deferred and recognized in non-current assets on the balance sheet. Therefore, it is to be written off in the balance sheet account over the asset’s life; if the debentures are issued for five years, then the debenture issue expense will be amortized in 5 years. It includes start-up costs, advertising fees, etc., and is recorded per the matching principle; hence, it is to be amortized systematically or over the asset’s life.

Purpose

The purpose of deferring expenses is explained below:

• Record the expense as per the matching concept and generally accepted accounting principles.
• To show a true and fair view of the accounts and save the company from showing heavy loss by recognizing the deferred expense at once.
• Give long-term benefits to the organization by incurring the expense which will benefit in the future.
• To deal with the accounting treatment of expenses like start-up cost, heavy expense on advertising, debt issue expenses, share issue expenses, etc.

Example of Deferred Expenses (With Excel Template)

Let’s take an example to understand the calculation of deferring expenses in a better manner.

Example

Company A Ltd. issued the debentures, 12,000, 7% debentures of $ 100 per debenture, and debentures will be redeemed after seven years. For issuing the debenture, the company paid a 1% underwriting commission and $ 15,000 as legal and other paperwork. Interest on debentures is to be paid yearly. Calculate the deferred expense and pass the journal entries.

Solution:

Debenture Issue Expenses

Journal Entries:

Accrual Accounting

As per the accrual system of accounting, expenses are to be recorded as and when they are incurred, whether paid or not. Similarly, deferred expenses are also to be recorded irrespective of whether they are paid or not, and amortization is to be done systematically.

Deferred Expenses Journal Entry

Deferred Expenses are to be amortized annually systematically as per the term agreed.

Difference Between Deferred Expenses and Prepaid Expenses

Both the deferred expenses and prepaid expenses are advance payments by the company, but there are certain differences between the two, which are as follows:

• When the company gives advance payment for a period longer than a year, then it is deferred expenses, whereas when the company gives advance payment for the period falling within one year, then it is prepaid expenses
• It is listed under the long-term asset section of the balance sheet, whereas the prepaid expenses are listed as the current assets in the balance until their benefit is realized.
• It is to be recorded irrespective of whether they are paid, whereas advance cash payment is necessary for recording prepaid expenses.
• Examples of deferred expenses are share issue cost, underwriting commission, debenture issue cost, etc., whereas an example of prepaid expenses is prepaid rent, prepaid taxes, prepaid insurance, etc.
• It is non-recurring, whereas prepaid expenses can be recurring in nature.

Benefits

Some of the major benefits are described below:

• The expenses are to be amortized systematically; hence true and fair view can be reflected.
• It gives the proper accounting treatment of the expenses that are neither recurring nor capital in nature.
• Proper accounting of deferred expenses can prevent showing heavy losses and misguiding the investors.

Conclusion

Deferred expenses are those expenses that are incurred to give long-term benefit to the organization, like share issue expenses, debenture issue expenses, loan commitment, and other charges, etc. they are recorded as a non-current asset and to be amortized over the life of the benefit or on a systematic basis. The deferred expenses differ from prepaid expenses; advance payment is necessary for prepaid expenses. In contrast, it has to be recorded irrespective of whether payment is made. Proper accounting of deferred assets helps the organization show the true and fair view per the matching principle and prevents the company from showing heavy losses by recognizing the whole expenses simultaneously, thereby misguiding the investors.

Recommended Articles

This is a guide to Deferred Expenses. We also discuss the introduction and purpose of deferring expenses, benefits, and examples. You may also have a look at the following articles to learn more –

1. Accrued Expenses
2. SG & A Expenses
3. List of Operating Expenses
4. Non-Cash Expenses