A deferred expense, also called a prepaid expense is a cost that has already been incurred, but which has not yet been consumed. The cost is recorded as an asset until such time as the underlying goods or services are consumed; at that point, the cost is charged to expense. A deferred expense is initially recorded as an asset, so that it appears on the balance sheet (usually as a current asset, since it will probably be consumed within one year).
Examples of deferred expenses are:
- Interest costs that are capitalized as part of a fixed asset for which the costs were incurred
- Insurance paid in advance for coverage in future months
- The cost of a fixed asset that is charged to expense over its useful life in the form of depreciation
- The cost incurred to register the issuance of a debt instrument
- The cost of an intangible asset that is charged to expense over its useful life as amortization
