Deferred cost definition
/What is a Deferred Cost?
A deferred cost is a cost that you have already incurred, but which will not be charged to expense until a later reporting period. In the meantime, it appears on the balance sheet as an asset. The reason for deferring recognition of the cost as an expense is that the item has not yet been consumed; instead, it is expected to provide an economic benefit in one or more future periods. You may also defer recognition of a cost in order to recognize it at the same time as related revenue is recognized, under the matching principle.
You should defer the costs of some expenditures when generally accepted accounting principles or international financial reporting standards require that they be included in the cost of a long-term asset, and then charged to expense over a long period of time. For example, you may have to include the cost of interest in the cost of a constructed asset, such as a building, and then charge the cost of the building to expense over many years in the form of depreciation. In this case, the cost of the interest is a deferred cost.
From a practical perspective, it is customary to charge all smaller costs to expense at once, since they would otherwise require too much effort by the accounting staff to track on a long-term basis. Immediate charge-off is only practiced when the impact on the financial results of a business is immaterial.
Presentation of Deferred Costs
Deferred costs are presented within the current assets section of the balance sheet, as long as they are expected to be consumed within one year (which is usually the case). Deferred costs classified as current assets are usually stored within the prepaid expenses line item on the balance sheet. If the total ending balance in the prepaid expenses account is quite small, it may be aggregated with other assets and reported within an "other assets" line item on the balance sheet.
If deferred costs are expected to be consumed over a longer interval, then they are presented within the long-term assets section of the balance sheet.
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Examples of Deferred Costs
As an example of deferred costs, if you pay $1,000 in February for March rent, then it is a deferred cost in February, and it is initially recorded as a prepaid expense. Once March arrives, you consume the asset and change it into rent expense. Other examples of deferred costs are:
Interest cost that is capitalized as part of a fixed asset
The cost of a fixed asset that is charged to expense over time in the form of depreciation
The cost of an intangible asset that is charged to expense over time as amortization
Insurance paid in advance for coverage in future periods
The costs incurred to register a bond issuance
Terms Similar to Deferred Cost
A deferred cost is also known as a prepaid expense.