Deferred Charge


DEFINITION of '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.

  1. Revenue

    The amount of money that a company actually receives during a ...
  2. Balance Sheet

    A financial statement that summarizes a company's assets, liabilities ...
  3. Current Assets

    A balance sheet account that represents the value of all assets ...
  4. Other Current Assets - OCA

    A firm's assets that do not include cash, securities, receivables, ...
  5. Generally Accepted Accounting Principles ...

    The common set of accounting principles, standards and procedures ...
  6. Expense

    1. The economic costs that a business incurs through its operations ...
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  1. What are the differences between deferred expenses and prepaid expenses?

    Companies have the option to pay expenses forward for certain costs associated with doing business, creating an accounting ... Read Full Answer >>
  2. Can working capital be depreciated?

    Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation ... Read Full Answer >>
  3. Do working capital funds expire?

    While working capital funds do not expire, the working capital figure does change over time. This is because it is calculated ... Read Full Answer >>
  4. How much working capital does a small business need?

    The amount of working capital a small business needs to run smoothly depends largely on the type of business, its operating ... Read Full Answer >>
  5. What does high working capital say about a company's financial prospects?

    If a company has high working capital, it has more than enough liquid funds to meet its short-term obligations. Working capital, ... Read Full Answer >>
  6. How can working capital affect a company's finances?

    Working capital, or total current assets minus total current liabilities, can affect a company's longer-term investment effectiveness ... Read Full Answer >>

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