Deferred charge

Deferred charge,

Definition of Deferred charge:

  1. A deferred charge is a long-term prepaid expense that is carried as an asset on a balance sheet until used/consumed. Thereafter, it is classified as an expense within the current accounting period. Deferred charges often stem from a business making payments for goods and services it has not yet received, such as prepaid insurance premiums or rent.

  2. There are two systems of accounting: cash basis and accrual basis. Cash accounting, most commonly used by small businesses, records revenues and expenses when payments are received or paid out. Accrual accounting records revenues and expenses as they are incurred regardless of when cash is exchanged. If the revenue or expense is not incurred in the period when cash/payment is exchanged, it is booked as deferred revenue or deferred charges. The accrual method is required for businesses with sales exceeding $5 million per year or with inventories available to the public and gross receipts exceeding $1 million per year.

  3. Cost that is accounted-for in the future (and not in the accounting period in which it is incurred) because of its anticipated future benefit, or to comply with the requirement of matching costs with revenues. Deferred charges include start up costs, financing costs for long-term debt, costs of advertising campaigns, etc., and are carried as a non-current asset on the balance sheet pending amortization. in contrast to prepaid expenses (such as insurance, interest, rent) deferred charges usually extend over a long period (often five years or more) and occur infrequently. Since they have no physical substance (cash realizability) and cannot be used in reducing total liabilities, deferred charges are subtracted from the total assets of the firm when computing financial ratios.

Meaning of Deferred charge & Deferred charge Definition