DEFERRED CHARGES: WHAT THEY ARE AND EXAMPLES - DUDAS - 2025

The deferred charges are the long - term costs prepaid, carried as an asset on the balance sheet until they are used or consumed. Subsequently, once completed, the deferred charge is reclassified as a deferred expense in the current accounting period.

Therefore, a deferred charge is an expense that is paid in one accounting period, but for which the underlying asset will not be fully consumed until one or more future periods have been completed. They often come from a company that makes payments for goods and services that it has not yet received.

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This is particularly common when a business does not have established credit and vendors are only willing to accept cash advance terms.

If a business does not post any expenses as a deferred charge, it will most likely use the cash basis of accounting. Deferred charges are required for transactions that qualify as such, according to generally accepted accounting principles.

What is a deferred charge?

There are two accounting systems: cash basis and accrual basis. Cash accounting, commonly used by small businesses, records income and expenses at the time payments are received or made.

Accrual accounting records income and expenses as they are incurred, regardless of when the cash is exchanged.

If no income or expense is incurred in the period that the payment is made or the cash is exchanged, it is accounted for as deferred income or deferred charges.

In any case, deferred charges must be detailed in a schedule that indicates the remaining balance of each item. If deferred charges are amortized over time, the schedule should indicate the amount of amortization per period.

Accounting staff use this program to reconcile the balance in the deferred charge account at the end of each accounting period. This will ensure that the required amortization has been completed.

This is a necessary document for auditors, if a company intends to have its books audited at the end of the fiscal year.

Difference with deferred expenses

Companies have the option of paying expenses in advance, before certain costs associated with doing business occur. This creates an accounting entry on the balance sheet, known as a deferred expense or a deferred charge. There are some clear differences between the two accounting terms.

Time frame

One of the key differentiators is time. Assets and liabilities on a balance sheet usually differentiate and divide their line items between current and long-term.

Deferred expenses are related to a specific time frame. That is, prepaid transactions must occur within one year. For example, the expense transaction for prepaid rent has a duration of twelve months.

On the other hand, deferred charges have a longer transaction time frame. This exceeds one year, during which they are distributed through gradual charges.

The total consumption of a deferred charge will be years after the initial purchase is made. For example, a company that issues bonds to raise capital incurs considerable costs during the issuance process.

Debt issuance fees can be classified as a deferred charge. The company may use up the same part of the costs during the 20 or 30 years of the bond.

Idea

Deferred expenses are routinely generated by default. Therefore, the company needs to continuously consume these elements of expenses to facilitate the different functions and activities.

For example, rental and insurance premiums occur regularly. These expenses are extremely necessary to facilitate business activities.

On the other hand, deferred charges do not occur frequently because they are linked to strategic business plans, which are spread over a long period of time, such as professional fees, which are rarely incurred.

Accounting management

Deferred expenses are posted as assets on the books and then consumed at equal intervals until depleted.

In accrued accounting entries, the amount of deferred expenses is recorded as a credit in the deferred expense account and is classified as current assets. The credit inflow is posted to accounts payable.

The installments of the monthly charges for deferred spending are posted as a debit to the cash account and as a credit to the specific provider's account.

Deferred charges are spread over various accounting periods. In accounting, the costs of deferred charges are not accounted for every month, but as accumulated figures for a given period, after the costs are incurred.

The amount of a deferred charge is recorded as a credit in the deferred charge account and is classified as a long-term asset. The credit inflow is posted to accounts payable.

Accumulated fees for deferred charges are posted as a debit to the cash account and as a credit to the specific vendor account.

Examples

Example 1

A corporation could spend $ 500,000 in accounting, legal and other fees to issue $ 40,000,000 of bonds payable. Instead of charging the $ 500,000 in expenses in the year the bonds are issued, the corporation will "defer" the $ 500,000 to a balance sheet account, as bond issuance costs.

If the bonds mature in 25 years, the corporation will incur an expense of $ 20,000 each year for bond issuance costs ($ 500,000 divided by 25 years).

This accounting treatment does a better job of matching the $ 500,000 to the periods when the company will earn income from the use of the $ 40,000,000.

Example 2

Another example of a deferred charge is the insurance premium of $ 12,000, which a company pays on December 27 for insurance protection for the next January 1 through June 30.

On December 27, $ 12,000 is deferred to the balance account, as prepaid insurance.

Starting in January, an expense of $ 2,000 per month will be made. Again, postponement was necessary to achieve the principle of correspondence.

Other examples

Deferred charges may include professional fees and amortization cost. Likewise, the loss of value of intangible assets, such as copyright and research and development. Advertising and tool prepayments can also be deferred charges.

References

1. Will Kenton (2018). Deferred Charge. Investopedia. Taken from: investopedia.com.
2. Melissa Horton (2018). What are the differences between deferred expenses and prepaid expenses? Investopedia. Taken from: investopedia.com.
3. Steven Bragg (2018). Deferred charge. Accounting Tools. Taken from: accountingtools.com.
4. Paul Merchant (2017). Difference Between Deferred Charges & Prepaid Expenses. Bizfluent. Taken from: bizfluent.com.
5. Harold Averkamp (2018). What is the difference between a deferred expense and a prepaid expense? Accounting Coach. Taken from: accountingcoach.com.