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

• Effects of GAAP on the Income Statement

  • These differences are due to the recording requirements of GAAP for financial accounting (usually following the matching principle and allowing for accruals of revenue and expenses) and the requirements of the IRS's tax regulations for tax accounting (which are more oriented to cash).
  • For example, rent or other revenue collected in advance, estimated expenses, and deferred tax liabilities and assets may create timing differences.
  • Also, there are events, usually one time, which create "permanent differences," such as GAAP, which recognizes as an expense an item that the IRS will not allow to be deducted.
  • This governs the matching of expenses and revenues, where expenses are recognized, not when the work is performed or when a product is produced, but when the work or the product actually makes its contribution to 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

• 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.

• Other Expenses

  • Other expenses include SG&A, depreciation, amortization, R&D, finance costs, income tax expense, discontinued operations expenses.
  • 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, rent, and all expenses and taxes directly related to producing and selling product, etc. )
  • Other expenses or losses - expenses or losses not related to primary business operations, (e.g. foreign exchange loss).
  • Income tax expense - 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).
  • Operational expenses and non-operational expenses are the main cash outflow of a business.

• Sample Income Statement

  • It then calculates operating expenses which, when deducted from the gross profit, yield 'income from operations. ' The difference of other revenues and expenses is then applied to the income from operations.
  • Selling Expenses: Represents expenses needed to sell products (salaries of salespeople, commissions and travel expenses, advertising, freight, shipping, depreciation of sales, store buildings and equipment, et cetera).
  • Other expenses or losses: Expenses or losses not related to primary business operations (foreign exchange loss).
  • Finance costs: Costs of borrowing from various creditors (interest expenses, bank charges).
  • Income tax expense: 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.

• 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.

• Income Statements

  • Adding to income from operations is the difference of other revenues and other expenses.
  • 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 - expenses or losses not related to primary business operations, (e.g., foreign exchange loss).
  • Income tax expense - 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).