Deferred expense is a cost that has already been incurred, but which has not yet been consumed.

The expense is documented as an asset until the goods or services are utilized; at that juncture, the expense is then expensed. Initially, a Deferred Expense is logged as an asset, thus reflecting on the balance sheet (typically categorized as a Current Asset, as it is currently unused and is expected to be consumed within a year).

1. Configuring Deferred Accounting

Before initiating deferred accounting, familiarize yourself with the following settings, providing enhanced control over your deferred accounting management:

1. Automatically Process Deferred Accounting Entry: This setting is enabled by default. If you prefer not to automatically post deferred accounting entries, you can disable this setting. Without automatic processing, deferred accounting must be manually processed using the “Process Deferred Accounting” function.
2. Book Deferred Entries Based On: Deferred expense amounts can be booked based on two criteria: “Days” or “Months.” The default option is typically “Days.” If “Days” is selected, the deferred expense amount will be booked based on the number of days in each month. If “Months” is chosen, the amount will be booked based on the number of months. For instance, if “Days” is selected and a $12,000 expense needs to be deferred over 12 months, $986.30 will be allocated for a 30-day month, and $1,019.17 will be assigned for a 31-day month. If “Months” is selected, $1,000 of deferred expense will be booked each month, regardless of the number of days in the month.
3. Book Deferred Entries Via Journal Entry: By default, ledger entries are directly posted to book deferred expenses against an invoice. If you prefer to use journal entries for this purpose, enable this option.
4. Submit Journal Entries: This option applies only if deferred accounting entries are posted via journal entry. By default, journal entries for deferred posting are kept in draft status, necessitating user verification and manual submission. Enabling this option allows journal entries to be automatically submitted without user intervention.

2. How to use Deferred Expense 

Using Unico Plastics as an example of a Deferred Expense, let’s say the company pays $10,000 in April for its May rent. At the time of payment (in April), Unico Plastics defers this cost by recording it in the prepaid rent asset account. When May arrives, Unico Plastics has consumed the prepaid asset, so it credits the prepaid rent asset account and debits the rent expense account.

Other instances of Deferred Expenses include:

1. Interest costs that are capitalized as part of a fixed asset when the costs are incurred.
2. Insurance payments made in advance for coverage in future months.
3. The cost of a fixed asset that is expensed over its useful life through depreciation.
4. Costs associated with registering the issuance of a debt instrument.
5. The cost of an intangible asset expensed over its useful life as amortization.

For an internet subscription, customers typically pay upfront for services delivered monthly, making it a Deferred Expense for the customer.

2.1 Item

Within the Item master, navigate to the Deferred Expense section and activate the “Enable Deferred Expense” option. Here, you can also designate a Deferred Expense account (preferably a Current Asset account) for this specific item and specify the number of months.

2.2 Purchase Invoice

Upon creating a Purchase Invoice for the Deferred Expense Item, rather than recording the expense in the Expense Account, the purchase amount is credited to the Deferred Expense account (Asset account).

2.3 Journal Entry

Using the From Date and To Date specified in the Purchase Invoice Item table, Journal Entries are automatically generated at the conclusion of each month. These entries debit the value from the Deferred Expense account and credit the Expense Account designated for an item in the Purchase Invoice.