Deferred expense

Deferred expense
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Deferred expense (also called prepaid expense) is used to describe situation in which cash has been paid or received, but the expense has been postponed to later time. Because of postponement, it represents future benefit to the company and is treated as an asset. It is situation, when expense was not yet incurred so that benefits will be consumed later [1]. During the period it is booked in asset cash and at the end of period it is booked in expense asset. Prepaid expense is for example [2]:

  • deposit,
  • subscription,
  • insurance policy,
  • building,
  • equipment.

Accruals and deferrals context[edit]

Deferred expense is one of the four type of adjusting entries. Rest of three are: deferred revenue, accrued liability and accrued asset. Accruals and deferrals are shown is below table [3]:

Type Situation Example Entry during period Entry at end of period
Deferred expense cash is paid, but expense not incurred supplies, rent, insurance policy, buildings, equipment asset cash expense asset
Deferred revenue (called also unearned revenue) cash received, but revenue not earned deposits, subscriptions, gift certificates, rent cash liability liability revenue
Accrued liability expense incurred, but cash not paid salaries, interest, wages, taxes, rent no entry expense liability
Accrued asset revenue earned, but cash not received interest, rent no entry asset revenue

Deferral expense characteristics[edit]

All types of adjusting entries, including deferred expense have below characteristics [4]:

  • are internal transactions,
  • do not involve another entities,
  • they never cause increase or decrease in cash,
  • at least one balance sheet account is involved (asset or liability account),
  • at least one income statement is involved (revenue or expense account).

Footnotes[edit]

  1. Weygandt J. J., Kieso D. E., Kimmel P. D., (2010), p. 33
  2. Porter G., Norton C., (2006), p.164
  3. Porter G., Norton C., (2006), p.164, Weygandt J. J., Kieso D. E., Kimmel P. D., (2010), p. 33
  4. Porter G., Norton C., (2006), p.164

References[edit]

Author: Dominika Kaczmarczyk