A deferred charge is an expenditure that is paid for in one accounting period, but for which the underlying asset will not be entirely consumed until one or more future periods have been completed. Consequently, a deferred charge is carried on the balance sheet as an asset until it is consumed. Once consumed, a deferred charge is reclassified as an expense in the current period.
The following are examples of deferred charges:
- Tooling prepayments
- Underwriting fees on a bond issuance
A company may have been required to pay in advance under the terms imposed by a supplier, resulting in a large number of deferred charges. This is particularly common when a company has no established credit, and suppliers are only willing to accept cash-in-advance terms.
In all cases, deferred charges should be itemized on a schedule that states the remaining balance of each item. If deferred charges are being amortized over time, the schedule should state the amount of amortization per period. This schedule is used by the accounting staff to reconcile the balance in the deferred charges account at the end of each accounting period, and to ensure that all required amortization has been completed. This is a necessary document for the auditors, if a business intends to have its books audited at the end of the fiscal year.
If a company does not record any expenditures as deferred charges, it is more likely to be using the cash basis accounting. Deferred charges are required for qualifying transactions under generally accepted accounting principles (GAAP).
A deferred charge is also known as a prepaid expense. However, a more restrictive definition of a deferred charge is that it is a long-term asset; most prepaid expenses are considered to be current assets (that are liquidated within one year).