Unexpired cost definition
/What is an Unexpired Cost?
An unexpired cost is any cost that has not yet been charged to expense because it still represents some residual value. In effect, this cost is expected to yield some additional value for the organization in future periods, so it is currently recorded as an asset. Once the residual value has been obtained, the remaining unexpired cost is charged to expense.
This cost is frequently associated with revenue that has not yet been recognized; under the matching principle, an unexpired cost is maintained on the books as an asset until the associated revenue is recognized, at which point the asset is charged to expense.
Types of Unexpired Costs
The main types of unexpired costs are noted below:
Inventory. Inventory represents goods purchased or manufactured that have not yet been sold. These items remain as assets on the balance sheet until they are sold, at which point their cost is recognized as an expense (cost of goods sold). Until then, inventory is considered an unexpired cost because it holds future economic value.
Prepaid expenses. Prepaid expenses are payments made for services or benefits to be received in future periods, such as insurance or rent. They are initially recorded as assets and then gradually expensed over the periods they benefit. This gradual consumption reflects the transition of the unexpired cost into an expired cost.
Fixed assets. Fixed assets, such as buildings, machinery, and vehicles, are long-term assets that provide economic benefits over multiple years. Their cost is allocated to expense over their useful lives through depreciation. The unexpired portion is the remaining book value not yet expensed through accumulated depreciation.
Intangible assets. Intangible assets like patents, copyrights, and trademarks are recorded at cost and gradually expensed over their useful lives through amortization. Until fully amortized or impaired, they retain an unexpired cost that reflects their remaining economic utility. They are classified as long-term assets on the balance sheet.
Deferred charges. Deferred charges are expenditures that are capitalized because they benefit multiple future periods, such as bond issuance costs or certain research and development expenditures. These amounts are systematically amortized to expense over the periods they are expected to provide benefits. Until fully amortized, deferred charges are recognized as unexpired costs.
Examples of Unexpired Costs
Several examples of unexpired costs are as follows:
A company prepays $12,000 for 12 months of advertising. After three months, $9,000 of this prepayment is still an unexpired cost, because the associated advertising has not yet occurred.
A company acquires $5,000 of merchandise. Until the goods are sold, the $5,000 is an unexpired cost. Once the related sale is recognized, the $5,000 is charged to expense.