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What is a Deferred Expenditure?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 November 2016
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    Conjecture Corporation
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Also known as deferred expenses or deferred revenue expenditures, deferred expenditures are any type of business expenses that are paid for in one accounting period but are carried over into subsequent periods due to the benefit of those purchases providing benefits later on. Many companies account for these types of expenditures by tracking them in a special deferred expenditure account that is associated with other non-current expenses carried by the company. Once the benefits from the purchase are realized, the amount can be transferred to the profit and loss statement as a normal or current expenditure.

One of the easiest ways to determine if a particular expense should be classed as a deferred expenditure is to consider when benefits from the purchase will be realized. If the benefits are incurred immediately, then the expenditure should be classed as current. Should the benefits be realized incrementally over the course of several periods, then it is proper to account for the transaction in a deferred expenditure account. It is not unusual for a business to make sure that specific guidelines are in place for classifying various purchases, often as a means of keeping the process uniform and also making it easier to reconcile the accounting records for audits and for the preparation of reports used in preparing tax returns.

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A common example of a deferred expenditure is the cost of advertising. When a company launches a new advertising campaign, the chances of achieving immediate benefit in terms of revenue may or may not be present. Typically, the returns that are generated directly as a result of the advertising expenses incurred during one accounting period will be spread over several periods. In the interim, the cost is accounted for as non-current in the accounting records, and can be transferred once it is determined that the benefits associated with those particular expenditures have been fully realized.

Many companies also class several other types of expenses in this manner. Any type of prepaid insurance premiums may be classed as deferred expenses. In like manner, office supplies purchased in one period for use in a subsequent period qualify as a deferred expenditure. Just about any type of good or service that is purchased and paid for with plans to use it in a future accounting period will fit into this category. As long as the full benefit is not derived until a later point in time, there is a good chance that it can rightly be identified as a deferred expenditure.

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