An Overview of Deferred Expenses
Deferred expenses are the costs that a company has incurred, yet it has not consumed those costs. When the bookkeepers from a bookkeeping firm in Singapore are dealing with such expenses for business owners, they will record them as the company’s assets until the business consumes the goods or services. When the consumption happens, the accountants will charge the costs to expenses.
Initially, the deferred expenses are recorded as the assets of the company. Thus, they will appear in the balance sheet of the company. Typically, deferred expenses fall under the category of current assets because the company will most probably consume it in a year. Recording the expenses as deferrals are more suitable for transactions that involve larger sums.
In the real-life situation, deferring the expenses that do not involve a large amount of unconsumed products or services does not really make sense as the procedures associated with it are quite complicated. Instead of entering the information into the expense account, the accountants need to key in the deferrals into the accounting software manually, and they need to charge those deferrals to the expense accounts later on (Also see Accounting for Expenses). Thus, a better way of dealing with deferrals that do not involve a huge sum is to charge them to the expense account straight away if doing so is not going to bring any material impact on the company’s financial statements (Also see Understanding The Materiality Concept in Accounts).
For you to understand the treatments related to deferred expenses more clearly, let’s have a look at an example:
In January, XYZ Corporation has paid RM5,000 for its February rentals. As soon as it makes the payment, it should defer the cost in the prepaid rental account, which is an asset account. In the next month, it has consumed the prepaid expenses (Also see What Are Accruals And Prepayments?), and this is when it should debit the rental expense account and credit the prepaid rental account.
Apart from rentals, another example of deferred expenses is the insurance that the company has paid beforehand for the insurance coverage in the future. Similar to the case above, this will be considered as the company’s asset too. Some people may call the deferred expenses as prepaid expenses as this refers to the payment that the company has made in advance.