Deferred Expenses / Deferred Expenditure - Definition - Recognition And Accounting Journal Entry

Previously, we study about Deferred Revenue Journal Entries, now here we study about Deferred Expenditure Journal Entries in Accounting. Deferred Expenses are also know as Prepayments.

Deferred Expenditure / Expenses Definition

What is Deferred Expenditure? It is simply shows all those expenses which are incurred by the business but for which the business still not received the benefits at the end of Current Accounting Period. It is also known as Prepaid Expenses or Expenses Paid In Advance.

Note: If Expenditures are incurred by the business but benefits or services are not received within the One Year, then we treated Deferred Expenditures as Fixed Assets or Non Current Assets Under Deferred Assets.

This is Current Asset under Deferred Assets for the Company because the company incurred the expenses in advance and still not received the benefits at the end of Current Accounting Period. On the other hand, it is Current Liability for the Company receiving the payment.

Example:

Let suppose, the company makes expenditures for the purchase of Prepaid Cards, then these expenditures are Current Assets for the company within the Current Accounting Period because these Prepaid Cards provide benefits to the company in future and the payment for purchasing these cards already be made by the company.

Deferred Expenditure Recognition

Deferred Expenditures are recognized according to Generally Accepted Accounting Matching Principle which says that all the expenditures incurred for the purpose of earning revenue must be matched with that particular revenue, so in this case, the company records Deferred Expenditures when the payment is made and matches the benefits or revenues of the Accounting Period with the Accounting Period in which expenditures are actually incurred.

Deferred Expenditures Accounting Treatment

There are two methods for recording Deferred Expenditures in the Book of the company:

1. When we record Prepaid Expenses as an Expense Initially 2. When we Consider Prepaid Expenses as A Current Asset

1. For the point of view of Accounting Purposes of this method, we consider our example of Prepaid Rent that we studied in our previous post.

Under this method, Initially, the company records all the expenses incurred as Expenses and at the end of the Current Accounting Period, the company transfers that portion of expenses against which the company still actually not get benefits or receive services. The company transfers that portion of expense in which it does not actually get benefits or receive services to Prepaid Expenses Under the head of Current Assets on Balance Sheet.

Let us consider an example in making clear understanding of this method. For Example, On 1^st March, 2016, the company paid Rs. 36000 for 18 months Rent to Real Estate Company. The Accountant of the Company records all the expenses paid as expense initially and pass the following Accounting Journal Entry in the book of company:

Rent a/c 36000

                        Cash a/c 36000

At the end of the Current Accounting Period, for 10 months starting from 1^st March to 31^st December, 2016, the company actually receives the services or gets benefits, e.g 2000 x 10 = Rs. 20000, then the accountant transfers only that portion of expenses against which the company actually still not get benefits or receive services. In this case, it is 2000 x 8 = Rs. 16000, So, The Accountant passed the following Accounting Adjusting Journal Entry in the Book of Company:

Prepaid Rent a/c 16000

                                Rent a/c 16000

This balance of Prepaid Rent is transferred to Balance Sheet Under the Head of Current Assets as a Deferred Assets. As expenses has no balance so these are closed. So, The Rent a/c is transferred to Profit and Loss by passing Closing Journal Entries.

2. Under this method, the accountant of the company records the Rent Expenses as Current Assets and then transfers that portion of Prepaid Rent Expenses to Rent Expense against which the company actually gets the benefits or receives the services.

Prepaid Rent a/c 36000

                             Cash a/c 360000

At the end of the Current Accounting Period, that portion of Prepaid Rent against which the company actually gets benefits or receives the services will be transferred to Rent Account.

Rent a/c 20000

                                     Prepaid Rent a/c 20000

The remaining balance of Prepaid Rent a/c is Rs. 16000 which is transferred to Balance Sheet Under the Head of Current Assets and the Rent a/c is closed by transferring to Profit And Loss Account through Passing Closing Journal Entries.

You can see, under both methods, the result is the same. We transfer Rs. 16000 To Prepaid Rent To Balance Sheet and Rent a/c is closed by Rs. 20000 and it is transferred to Profit And Loss Account.

So, it is all about Deferred Expenditure Definition, Recognition, Examples and Accounting Journal Entries.