Deferred Expense is a term which will be discussed in details here. Deferred Expense is way of recording will also be explained here. It is an expense which refers to an item that will be primarily recorded as an benefit or an asset but what is expected is that is to become an expense over normal operations and time. It can also be called as prepaid expenses. It term itself indicates that first this is an asset and later this will be changed to an expense.
It is a basic concept in accounting. In accounting you have to decide whether an item is a liability or an asset. For example money is an asset. This will never be treated as a liability or an expense. Money increases the worth of the person who is having the possession of money. If you pay for something which is to happen in future that is pre pay then the situation is that you had paid before the actual use of the product or service. This type can be accounted by the system of Deferred Expense. It is very useful in such matters. All accounting uses journals that will be recording Deferred Expense. There are mainly two types or categories for Deferred Expense that is Deferred Expenses and Deferred items. First you have to understand what this is.
Deferred Expense is an item. It is pre-paid and will be recorded or treated as an asset in business. Deferred Expense has many examples. Let’s see some examples for this. This can be seen in prepaid insurance premiums, prepaid rentals; pre paid office supplies and prepaid payroll expense. These are just a few examples. It can be find out by an easy way. For finding whether Deferred Expense is same you just have to simply decide when the business will be making use of the expenses. If the expenses incurred are not used in the current month then it will be a Deferred Expense. Deferred Expense is clearly recorded by large corporate level business.
It is a payment that has been made already and shall not be treated as an expense. In this the word deferred over powers the word expense. It is always reported in the balance sheet. It will be in balance sheet until assets expire. The entries are called adjusting entries.
Example of a deferred expense is given here: An amount of $24,000 was paid as an insurance premium by a company on December 25, 2009 for insurance protection from January 2 through June 29, 2010. On December 25, 2009 the $24,000 is deferred to the balance sheet account Prepaid Insurance. Commencement in January 2006 it will be entered as expense at the rate of $4,000 per month.