deferred expense

Examples of deferred expense in the following topics:

• Differences Between Accrued and Deferred Expenses

  • Accrued expenses and deferred expenses are two examples of mismatches between when expenses are recognized under the matching principle and when those expenses are actually paid.
  • A deferred expense is an asset that represents a prepayment of future expenses that have not yet been incurred.
  • Deferred expense is generally associated with service contracts that require payment in advance.
  • So the business will record a $12,000 deferred expense asset.
  • Accrued and deferred expenses are both listed on a company's balance sheet.

• Importance of Recognition and Measurement

  • Deferred expense (prepaid expense) allows matching costs of products paid out to those not received yet.
  • Accrued expenses shares characteristics with deferred revenue.
  • Deferred expenses, or prepaid expenses or prepayment, are an asset.
  • Deferred expenses share characteristics with accrued revenue.
  • Prepaid expenses, such as employee wages or subcontractor fees paid out or promised, are not recognized as expenses (cost of goods sold), but as assets (deferred expenses), until the actual products are sold.

• Unearned and Deferred Revenues

  • A deferred item, in accrual accounting, is any account where a revenue or expense, recorded as an liability or asset, is not realized until a future date (accounting period) or until a transaction is completed.
  • Examples of deferred items include annuities, charges, taxes, income, etc.
  • If the deferred item relates to an expense (cash has been paid out), it is carried as an asset on the balance sheet.
  • A deferred revenue item involves cash received before the earnings process is complete.
  • Explain the purpose of classifying transactions as either deferred or unearned revenue

• Overview of Income Tax Accounting

  • Also, the actual amount of tax liability due to the IRS may not be the same as the income tax expense reported on the income statement.
  • The deferred method is an income-statement-oriented approach.
  • This method seeks to properly match expenses with revenues in the period the temporary difference originated.
  • Federal income tax law, a net operating loss (NOL) occurs when certain tax-deductible expenses exceed taxable revenues for a taxable year.
  • Summarize how to account for deferred taxes under the deferred method and the asset-liability method

• Terminology of Accounting

  • The cash basis of accounting, or cash receipts and disbursements method, records revenue when cash is received and expenses when they are paid in cash.
  • In contrast, the accrual method records income items when they are earned and records deductions when expenses are incurred, regardless of the flow of cash.
  • Accrual accounts include, among others, accounts payable, accounts receivable, goodwill, deferred tax liability and future interest expense.
  • The term accrual is also often used as an abbreviation for the terms accrued expense and accrued revenue.
  • An example of an accrued expense is a pending obligation to pay for goods or services received from a counterpart, while cash is to be paid out in a latter accounting period when the amount is deducted from accrued expenses.

• Other Current Liabilities: Sales Tax, Income Tax, Payroll, and Customer Advances

  • Net earnings are generally considered gross revenue minus expenses.
  • Expenses can vary; for example, corporate expenses related to fixed assets are usually deducted in full over their useful lives by using percentage rates based on the class of asset to which they belong.
  • If the book-tax difference is carried over more than a year, it is referred to as a deferred tax.
  • Future assets and liabilities created by a deferred tax are reported on the balance sheet.
  • The receipt of $12,000 for the annual maintenance contract is initially recorded as deferred revenue.

• Valuing Repairs, Maintenance, and Additions

  • Since these expenditures benefit an increased number of future periods, accountants capitalize rather than expense them.
  • If an expenditure that should be expensed is capitalized, the effects are more significant.
  • The company capitalized the USD 6,000 that should have been charged to repairs expense in 2010.
  • Generally, a policy of continued deferred maintenance may result in higher costs, asset failure, and in some cases, health and safety implications.
  • Therefore, asset repairs and maintenance are expensed on the income statement at the market value paid for the services rendered.

• Preparation of the Income Statement

  • Selling, General, and Administrative expenses (SG&A or SGA) consist of the combined payroll costs.
  • Selling expenses represent expenses needed to sell products (e.g., salaries of sales people, commissions and travel expenses, advertising, freight, shipping, depreciation of sales store buildings and equipment, etc.).
  • Research & Development (R&D) expenses represent expenses included in research and development.
  • Other expenses or losses not related to primary business operations (e.g., foreign exchange loss).
  • Income tax expense is the sum of the amount of tax payable to tax authorities in the current reporting period (current tax liabilities/ tax payable) and the amount of deferred tax liabilities (or assets).

• Cost of Goods Sold and Gross Profit

  • The costs of those goods not yet sold are deferred as costs of inventory until the inventory is sold or written down in value.
  • These costs are treated as an expense during the period in which the business recognizes income from sale of the goods.

• Overview of Pension Accounting

  • Since, the actual cash flows are not counted each year; this means the annual pension expense is based on rules that attempt to capture changing assumptions about the future.
  • The employer (sponsor) reports pension expense on the income statement, and a pension liability which is the sum of two accounts, accrued/prepaid pension cost and additional liability, and an intangible asset-deferred pension cost (if required).
  • In addition to reporting the pension expense on the income statement companies should disclose the following information about the pension plan:
  • The amounts for the components of pension expense for the period