Account for Deferred Expenses

by Greg DePersio

1 min read

You may come across a situation where you pay a bill in advance. This prepaid bill is a type of transaction called a deferred expense, which arises when you want the expense of an item to hit in a later month than the cash payment was made. By performing certain journal entries, you can defer the expense from when you made the payment to when the benefit is received. A deferred expense can only be entered if you are using an accrual method of accounting.As an example, imagine you pay $1,000 in April for registration fees for a conference that will happen in September. Although the cash payment was made in April, the actual benefit of the conference is not received until several months later. Plus, if the conference is cancelled or you are unable to make it, you may end up getting a refund. Therefore, you don’t want to recognize an expense until you’ve actually gone to the conference. Other examples of deferred expenses include insurance paid in advance, rent paid in advance, and fixed assets that depreciate over time.The deferral process of an expense is done by putting the original payment to a balance sheet account. The account you’d normally use is a prepaid account. Then, once the benefit is received, you reduce the balance in the prepaid and recognize the expense. You make this happen with a journal entry that debits the prepaid and credits the expense. By entering these entries, you can defer an item you paid at the present time and have the expense hit in the future. This delay in the reporting of an expense makes your financial statements more accurate, reliable, and useful in making decisions.

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