Deferred Charge

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Impose

    The act of placing a fee, levy, tax or charge on an asset or ...
  2. Balance Sheet

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

    1. The economic costs that a business incurs through its operations ...
  4. Generally Accepted Accounting Principles ...

    The common set of accounting principles, standards and procedures ...
  5. Current Assets

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

    A firm's assets that do not include cash, securities, receivables, ...
Related Articles
  1. Investing Basics

    Reading The Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  2. Investing Basics

    The Working Capital Position

    Learn how to correctly analyze a company's liquidity and beat the average investor.
  3. Personal Finance

    Top 8 Ways Companies Cook The Books

    Find out more about the fraudulent accounting methods some companies use to fool investors.
  4. Quality financial reports allow for effective, informative fundamental analysis.
    Investing Basics

    The Importance Of Corporate Transparency

    Clear and honest financial statements not only reflect value, they also help ensure it.
  5. Investing Basics

    How To Evaluate A Company's Balance Sheet

    Asset performance shows how what a company owes and owns affects its investment quality.
  6. Fundamental Analysis

    How should a company budget for capital expenditures?

    Learn the difference between capital expenditures and operational expenses, and discover the importance of budgeting for capital expenditures.
  7. Fundamental Analysis

    What is accrual accounting in Oracle Apps?

    Learn more about Oracle Applications, an enterprise software system that enables businesses to streamline information systems – including accrual accounting.
  8. Fundamental Analysis

    Why do companies publish P&L statements?

    Understand the basics of the profit and loss statement, including why it is published and how it is used to assess financial stability.
  9. Investing Basics

    What is the first day of the quarter?

    Learn when the first day of the quarter is. Explore why investors and analysts prefer to compare results year-over-year due to seasonality.
  10. Investing Basics

    What is the difference between a quarter and a year in finance?

    Examine the difference between a fiscal quarter and a fiscal year. Learn why investors examine both quarterly and annual growth rates.

You May Also Like

Hot Definitions
  1. Christmas Island Dollar

    The former currency of Christmas Island, an Australian island in the Indian Ocean that was discovered on December 25, 1643. ...
  2. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  3. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  4. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  5. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  6. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
Trading Center