Deferred expense

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

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

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

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

• Hanlon M., (2003), What Can We Infer About a Firm’s Taxable Income from its Financial Statements?, presented at April 25, 2003 conference on corporate tax return disclosure, jointly sponsored by the University of North Carolina Tax Center, BrookingsUrban Institute Tax Policy Center, and The National Tax Association
• Ifada L. M., Wulandari N, (2015), The Effect Of Deferred Tax And Tax Planning Toward Earnings Management Practice: An Empirical Study On Nonmanufacturing Companies Listed In Indonesia Stock Exchange In The Period Of 2008-2012 in "The international journal of organizational innovation volume 8 number 1", International Association of Organisational Innovation
• Porter G., Norton C., (2006), Financial Accounting: The Impact on Decision Makers, Cengage Learning
• Wang T. J., Gao X., Zhan J., (2016), Analyze this, analyze that : a reversing entry case in "Curriculum and Programs, Curriculum Development", Cengage Learning Inc
• Weygandt J. J., Kieso D. E., Kimmel P. D., (2010), Problem Solving Survival Guide t/a Financial Accounting, John Wiley & Sons

Author: Dominika Kaczmarczyk