
Deferred Charge
A deferred charge is a long-term prepaid expense that is carried as an asset on a balance sheet until used/consumed. 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. A company may capitalize the underwriting fees on a corporate bond issue as a deferred charge, subsequently amortizing the fees over the life of the bond issue. Deferred revenue, on the other hand, refers to money the company has received as payment before a product or service has been delivered. As is the case with deferred charges, deferred revenue ensures that revenues for the month are matched with the expenses incurred for that month. Under the accrual accounting system, a deferred charge occurs if the revenue or expense is not incurred in the same period as when payment is exchanged.

What Is a Deferred Charge?
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.



How a Deferred Charge Works
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 average annual gross receipts for the 3 preceding tax years of $25 million or more.
Deferred Charge vs. Deferred Revenue
Recording deferred charges ensure that a company's accounting practices are in accordance with generally accepted accounting principles (GAAP) by matching revenues with expenses each month. A company may capitalize the underwriting fees on a corporate bond issue as a deferred charge, subsequently amortizing the fees over the life of the bond issue.
Deferred revenue, on the other hand, refers to money the company has received as payment before a product or service has been delivered. For example, a tenant who pays rent a year in advance may have a happy landlord, but that landlord must account for the rental revenue over the life of the rental agreement, not in one lump sum. Each month, the landlord uses a portion of the funds from deferred revenue and recognizes this portion as revenue in the financial statements. As is the case with deferred charges, deferred revenue ensures that revenues for the month are matched with the expenses incurred for that month.
Example of a Deferred Charge
To receive a discount, some companies pay their rent in advance. This advanced payment is recorded as a deferred charge on the balance sheet and is considered to be an asset until fully expensed. Each month, the company recognizes a portion of the prepaid rent as an expense on the financial statements. Also, each month, another entry is made to move cash from the deferred charge on the balance sheet to the rental expense on the income statement.
A deferred charge is the equivalent of a long-term prepaid expense, which is an expenditure paid for an underlying asset that will be consumed in future periods, usually a few months. Prepaid expenses are a current account, whereas deferred charges are a non-current account.
Related terms:
Accounting Practice
Accounting practice is the process of recording the day-to-day financial activities of a business entity. read more
Accounting
Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business to oversight agencies, regulators, and the IRS. read more
Accounting Method
Accounting method refers to the rules a company follows in reporting revenues and expenses in accrual accounting and cash accounting. read more
Accrual Accounting
Accrual accounting is an accounting method that measures the performance of a company by recognizing economic events regardless of when the cash transaction occurs. read more
Accrued Revenue
Accrued revenue—an asset on the balance sheet—is revenue that has been earned but for which no cash has been received. read more
Accrued Expense
An accrued expense is recognized on the books before it has been billed or paid. read more
Accrued Interest & Example
Accrued interest refers to the interest that has been incurred on a loan or other financial obligation but has not yet been paid out. read more
Adjusting Journal Entry
An adjusting journal entry occurs at the end of a reporting period to record any unrecognized income or expenses for the period. read more
Cash Basis
Cash basis is a major accounting method by which revenues and expenses are only acknowledged when the payment occurs. Cash basis accounting is less accurate than accrual accounting in the short term. read more
Financial Statements , Types, & Examples
Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements include the balance sheet, income statement, and cash flow statement. read more