Deferred expenditure - What is a deferred expenditure?
A deferred expenditure (expense) is a cost to a company that has been paid but only impacts on the company’s profit/loss accounts later in the fiscal year or the next, depending on when it will be used
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Small companies may not reflect deferred expenditure in their accounts but larger corporate entities will have company accounting policies to deal with deferred expenditure or prepayments as by the very nature of the business and the size may have a big impact in the financial records of the company.
What can deferred expenses be used for?
The deferral of expenses can be applied to any purchase that will be consumed in full either in increments or at a later date. The practice of deferring expenditures usually applies to larger, more expensive investments that will be consumed over time.
Common examples of deferred expenditures include:
- Rent on office space
- Startup costs
- Advertising fees
- Advance payment of insurance coverage
- An intangible asset cost that is deferred due to amortisation
- Tangible asset depreciation costs
Deferred expenditure in practice
A deferred expenditure is placed on the balance sheet as an asset, since it is something that has been paid a certain amount for, but has not yet been used in its entirety. Some are considered current assets, if they are used fully within a year.
Example of a deferred expenditure:
- Your company purchases £4,000 of packing materials but only uses £1,000 within the month they were purchased
- By charging the full amount of £4,000 to your profit/loss account in that month, you would be distorting your figures
- The solution is to place the remaining amount on the balance sheet (in your records) as deferred expenditure and charge an appropriate amount the following month(s)
Deferred expenditure & Debitoor
In Debitoor, you can register and track the depreciation of both short and long-term assets over time automatically with straight-line depreciation. This allows you to stay on top of the value of your assets and keep tabs on the financial health of your business.