Deferred Expense (Accounting) - Explained
What is a Deferred Expense?
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Table of ContentsWhat is a Deferred Expense? What is an accounting adjustment for deferred expense?Examples of Accounting for a Deferred Expense
What is a Deferred Expense?
Deferred expenses are assets paid in advance of receiving their benefits. I paid for these upfront but I haven't used them yet. They often require an accounting adjustment as they are used.
What is an accounting adjustment for deferred expense?
I can't expense a deferred expense until the very end of the accounting cycle.
A great example of this would be stamps. I purchase stamps up front. As I use one stamp and put it on an envelope and then send it off, I've used that one stamp. Theoretically, I could expense that one stamp. But why would I expense that one stamp when I'm going to use them for the rest of the year. So, what I'll do is I'll wait till the very end of the year and just do one big entry for all that I use.
Once the asset has been used, the advanced payments become expenses. So, I convert them over from assets to expenses. That's why these are called deferred expenses.
Examples of Accounting for a Deferred Expense
Bravo Company pre-pays rent in the amount of $24,000 on April 1st. As of December 1, it has used $18,000. So, from April to December it used that rent month after month. Instead of doing a journal entry that says we're going to take it out of prepaid rent and put it into rent expense every single month, we'll just do what we did for the entire year we'll add them all up. We will defer that expense until the very end and then just do one big journal entry.
I've used $18,000 of the $24,000 that I prepaid. First you would start with the amount that you prepaid. We paid 24 000 for this year of rent. It started on April 1. So, this is a 9-month period. 9 months out of a total of 12 is 3/4ths of the period. Because you paid for a whole year, you multiply the $24,000 x 3/4 to arrive at the $18,000 amount.
We're going to continue adding on journal entries. We're taking it out of prepaid. December 31st we have rent expense - that's our debit of $18,000. Then we have a credit of $18,000 from prepaid rent. This takes it away from the $24,000.