What is a Deferred Asset?
Deferred asset refers to that expenditure that is paid in advance, but is not yet spent. There can be two situations from where deferred asset may arise –
- Short-term consumption –
For short term consumption, the purchased item is likely to be spent within few months after the expenditure is paid in advance. Recorded as a prepaid expense, this deferred asset initially appears as the current asset in the balance sheet.
- Long term consumption –
For long term consumption, the purchased item is not likely to be spent fully after the expenditure is made beforehand until several terms of reporting periods pass. In such scenario, the deferred asset is likely to be considered as the long-term asset in the relevant balance sheet.
Examples of Deferred Assets
Usually, expenditures like prepaid insurance, prepaid advertisement, prepaid rent and bond insurance costs are treated as the deferred assets.
Since there is a chance for charging the expenditure to expense before consuming the related benefits, these expenditures are treated as deferred assets. It results in extremely high expense identification in the previous accounting periods and remarkably low expense identification for the upcoming periods.
However, the concept of a deferred asset is not applicable when a business follows a cash basis accounting method as the expenditures are tracked under the expenses once the payment is made under this method.