What Is a Deferred Charge?

A deferred charge is a long-term prepaid expense that is carried as an asset on a balance sheet until used/consumed. Thereafter, it is classified as an expense within the current account♔ing period. Deferred charges often stem from a business making payments for goods and service🍎s it has not yet received, such as prepaid insurance premiums or rent.

How a Deferred Charge Works

There are two systems of accounting: 澳洲幸运5官方开奖结果体彩网:cash basis and 澳洲幸运5官方开奖结果体彩网:accrual basis. Cash accounting, most commonly used by small business♔es, records revenues and expeꦆnses when payments are received or paid out.

Accrual accounting records revenues and expenses as they are incurred regardless of when cash is exchanged. If the revenue or expense is not incurred in the period when cash/payment is exchanged, it is booked as deferred revenue or deferred charges. The accrual method is required for businesses with average annual gross receipts for the 3 preceding tax years of $25 million or more.

Deferred Charge vs. Deferred Revenue

Recording deferred charges ensure that a company's 澳洲幸运5官方开奖结果体彩网:accounting practices are in accordance with 澳洲幸运5官方开奖结果体彩网:generally accepted accജওounting principles (GAAP) by matching revenues with expens🧔es each month. A company may capitalize the underwriting fees on a corporate bond issue as a deferred charge, subsequently amortizing the fees over the life of the bond issue.

Deferred revenue, on the other hand, refers to money the company has 澳洲幸运5官方开奖结果体彩网:received as payment before a product or service has been delivered. For example, a tenant who pays rent a year in advance may have a happy landlord, but that landlord must account for the rental revenue over the life of the rental agreement, n💧ot in one lump sum. Each month, the landlord uses a portion of the funds from deferred revenue and recognizes this portion as revenue in 𝓰the financial statements. As is the case with deferred charges, deferred revenue ensures that revenues for the month are matched with the expenses incurred for that month.

Example of a Deferred Charge

To receive a discount, some companies pay their rent in advance. This advanced payment is recorded as a deferred charge on the balance sheet and is considered to be an asset until fully expensed. Each month, the company recognizes a portion of the prepaid rent as an expense on the 澳洲幸运5官方开奖结果体彩网:financial statements. Also, each month, another entry is made to move 🍌cash from the deferred charge on the balance sheet to the rental expense on the income statement.

A deferred charge is the equivalent of a long-term prepaid expense, which is an expenditure paid for an underlying asset that will be consumed in future periods, usually a few months. Prepaid expenses are a current account, whereas deferred charges are a non-current accou🌞nt.