What is a deferred cost?

I use the term deferred cost to mean a cost that has been incurred (and often already paid for) but will not appear as an expense on the income statement until a later accounting period. In the meantime, the deferred cost will be reported as an asset on the balance sheet. The justification for deferring an expense until a later accounting period is likely tied to the matching principle.

A common example of a payment that is deferred for less than a year is a payment for a one-year insurance premium. The unexpired portion of the cost will be reported as a prepaid expense in the current asset section of the balance sheet.

A payment that is deferred for more than one year is often reported in the long-term asset section as a Deferred Charge. For example, the payments for professional services necessary for issuing a long-term bond will likely be deferred in the balance sheet account Bond Issue Costs. Over the life of the bond this deferred cost will be amortized to expense—thereby matching these costs to the periods that the bond is outstanding.

Some interest expense incurred during the self-construction of a plant asset might be deferred. This is achieved by including it as part of the cost of the asset and then expensing it as part of the depreciation expense. This is referred to as the capitalization of interest.

Learn more about Adjusting Entries.

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