Deferred Charge

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 utilized/consumed. From that point, it is classified as an expense inside the current accounting period. Deferred charges frequently stem from a business making payments for goods and services it has not yet received, for example, prepaid insurance premiums or rent.

How a Deferred Charge Works

There are two systems of accounting: cash basis and accrual basis. Cash accounting, most regularly utilized by small businesses, records revenues and expenses when payments are received or paid out.

Accrual accounting records revenues and expenses as they are incurred paying little heed to when cash is traded. In the event that the revenue or expense isn't incurred in the period when cash/payment is traded, it is reserved as deferred revenue or deferred charges. The accrual method is required for businesses with average annual gross receipts for the 3 going before tax long stretches of $25 at least million.

Deferred Charge versus Deferred Revenue

Recording deferred charges guarantee that a company's accounting practices are as per generally accepted accounting principles (GAAP) by matching revenues with expenses every month. A company might capitalize the underwriting fees on a corporate bond issue as a deferred charge, in this way amortizing the fees over the life of the bond issue.

Deferred revenue, then again, alludes to money the company has received as payment before a product or service has been delivered. For instance, a tenant who pays rent a year in advance might have a blissful landlord, yet that landlord must account for the rental revenue over the life of the rental agreement, not in one lump sum. Every month, the landlord utilizes a portion of the funds from deferred revenue and perceives this portion as revenue in the financial statements. Similarly as with deferred charges, deferred revenue guarantees that revenues for the month are matched with the expenses incurred for that month.

Illustration of a Deferred Charge

To receive a discount, a few companies pay their rent in advance. This advanced payment is recorded as a deferred charge on the balance sheet and is viewed as an asset until completely expensed. Every month, the company perceives a portion of the prepaid rent as an expense on the financial statements. Additionally, every month, one more 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 ongoing periods, generally a couple of months. Prepaid expenses are a current account, while deferred charges are a non-current account.

Features

• Under the accrual accounting system, a deferred charge happens in the event that the revenue or expense isn't incurred in a similar period as when payment is traded.
• The accrual method is required for businesses assuming their average annual gross receipts for the 3 going before tax years is $25 at least million.
• Recording deferred charges guarantee that a company's accounting rehearses are as per generally accepted accounting principles (GAAP).