Deferred Expenses vs. Prepa📖id Expenses: An Overview

Companies have the opportunity to pay expenses ahead of certain costs associated with doing business. This can create an accounting entry on the balance sheet known as a prepaid expense or deferred expense.

For 澳洲幸运5官方开奖结果体彩网:accounting purposes, both prepaid expense and deferred expense amounts are recorded on a company’s balance sheet and will also affect the company’s 澳洲幸运5官方开奖结果体彩网:income statement when adjusted.

Since a business does not immediately reap the benefits of its purchase, both prepaid expenses and deferred expenses are recorded as assets on the balance sheet for the company until the expense is realized. Both prepaid and deferred expenses are 澳洲幸运5官方开奖结果体彩网:advance payments, but there are some clear differences 🌠betwe♔en the two common accounting terms.

As discussed below, one of the key differentiators is time. Assets and 澳洲幸运5官方开奖结果体彩网:liabilities on a ba♈lance sheet both customarily differentiate and divide their line items between current and long-term.

Deferred Expenses

Deferred expenses, also known as 澳洲幸运5官方开奖结果体彩网:deferred charges, fall in the 澳洲幸运5官方开奖结果体彩网:long-term asset category. When a business pays out cash for a payment in which consumption does not immediately take place or is not planned within the n𒊎ext 12 months, a deferred expense account is created to be held as a noncurrent asset on the balance sheet. Full consumption of a deferred expense will be years after the initial purchase is made.

For example, a business that issues bonds to raise capital incurs hefty costs during the issuance process. These may include legal fees to prepare documentation, investment banking fees for the bond 澳洲幸运5官方开奖结果体彩网:underwriter, or fees associated wi✃th accounting services, all of which can add up to hundreds of thousands of dollars for the company. The debt issuance fees can be categorized as a deferred expense, and the compaꦦny can deplete a portion of the costs equally over the 20- or 30-year lifetime of the bond.

Prepaid Expenses

Many purchases that a company makes in advance will be categorized under the label of prepaid expense. These prepaid expenses are those that a business uses or depletes within a year of purchase, such as insurance, rent, or taxes. Until the benefit of the purchase is realized, prepaid expenses are listed on the balance sheet as a 澳洲幸运5官方开奖结果体彩网:current asset.

For example, if a company pays its landlord $30,000 in December for rent from January through June, the business is able to include the total amount paid in its current assets in Decem🔥ber. As each month passes, the prepaid expense account for rent on the balance sheet is decreased by the monthly rent amount, and the rent expense account on the income statement is increased until the total $30,000 is depleted.

Key Differences

Both prepaid expenses and deferred expenses are important aspects of the accounting 💧process for a business. 🍌As such, understanding the difference between the two terms is necessary to report and account for costs in the most accurate way.

As a company realizes its costs, it then transfers them from assets on the balance sheet to expenses on the income statement, decreasing the 澳洲幸运5官方开奖结果体彩网:bottom line (or net income). The advantage here is that expenses are recognized, and 澳洲幸运5官方开奖结果体彩网:net income is decreased, in the time💎 period when the benefit was realized instead of when it was paid.

The Bottom Line

Deferred expenses and prepaid expenses are advance payments on a company’s balance sheet, but there are some clear differences between the two. Time is one of the key differentiators between the accounting terms.