Deferred Charge
Definition
A deferred charge, also known as a deferred expense, is an intangible expenditure carried forward as an asset on a company’s balance sheet. This expenditure is then amortized, or written off, over future periods in alignment with the benefit it provides. This accounting practice helps match the costs of the expenditure with the revenues generated, adhering to the matching principle in accounting.
Examples
- Mortgage Arrangement Fees: For instance, fees paid to secure a 30-year mortgage for an income-producing real estate property would be classified as a deferred charge. These fees are then amortized over the life of the mortgage.
- Research and Development Costs: Costs incurred for significant research and development activities can be deferred and amortized over the expected benefit period.
- Prepaid Insurance: Insurance premiums paid in advance for coverage of multiple future accounting periods can be treated as a deferred expense.
Frequently Asked Questions (FAQs)
1. What are deferred charges used for in accounting?
Deferred charges are used in accounting to allocate intangible expenses over the periods they benefit. This practice ensures that expenses are matched with the corresponding revenues, providing a more accurate financial picture.
2. How do you amortize deferred charges?
Deferred charges are amortized by systematically allocating the expense over the useful life of the expenditure. The amortization schedule depends on the duration of the benefit.
3. Is a deferred charge the same as a prepaid expense?
No, while both are similar in nature, a deferred charge is typically a longer-term asset amortized over an extended period, whereas prepaid expenses are shorter-term assets usually recognized within one year.
4. Are deferred charges considered assets or liabilities?
Deferred charges are considered assets. They represent expenses that have paid but are yet to be recognized on the income statement.
5. Can deferred charges apply to tangible assets?
No, deferred charges typically apply to intangible expenditures. Tangible assets are handled through depreciation rather than amortization.
Related Terms
- Amortization: The process of gradually writing off the initial cost of an intangible asset over a period.
- Prepaid Expense: An expense paid in advance and recognized as an asset until the benefit is realized, usually within one year.
- Depreciation: The process of allocating the cost of a tangible asset over its useful life.
- Asset: Resources owned by a company that have economic value and can provide future benefits.
- Liabilities: Obligations and debts a company owes to external entities.
Online References
Suggested Books for Further Studies
- “Financial Accounting” by Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Accounting for Dummies” by John A. Tracy
Fundamentals of Deferred Charge: Accounting Basics Quiz
Thank you for exploring the concept of deferred charges! This foundational knowledge is crucial for understanding how businesses manage and report their expenditures over time. Happy studying!