Deferred Charge

What is a 'Deferred Charge'

A prepaid expense that is treated as an asset on a balance sheet and is carried forward until it is actually used. Deferred charges often stem from a business making a payment for a good or service that it has not yet received, such as the prepaying of insurance premiums or rent. A company may pay for a year of rent in advance, for example, to receive more favorable terms; this advanced payment is recorded as a deferred charge on the balance sheet. Each month, the company can then use a portion of the funds in its deferred charges account and recognize this amount as an expense on any financial statements.


Also called prepaid expense.

BREAKING DOWN 'Deferred Charge'

Recording deferred charges ensures that a company's accounting practices are operating within the generally accepted accounting principles (GAAP) by matching revenues with expenses each month. A company may capitalize the underwriting fees on a corporate bond issue as a deferred charge, subsequently amortizing over the life of the bond issue. Deferred charges refer to payments that the company has made prior to receiving the corresponding goods and/or services. Deferred revenue, on the other hand, refers to money that the company has received as payments before a product has been delivered.

A prime example of a deferred charge is rent. Consider the case where a company pays a lump sum to its landlord to cover rent for six months. As each month approaches, the company will use a portion of the funds from its deferred charges account and recognize this portion as an expense on its financial statements. This process ensures that revenues for the month are matched with the expenses incurred for that month.

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RELATED FAQS
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