What is a Deferred Charge?
Deferred charges are expenses that are listed as assets until the goods or services involved in the transaction are actually received. Essentially, a deferred charge is an accounting strategy used to account for expenditures involving advance payments with the expectation that some type of product or benefit will be received in return at some future point in time. From this perspective, a deferred charge functions as the opposite of deferred revenue, which is listed as a liability in the accounting books until the supplier actually provides the goods or services related to the advance payment.
A deferred charge involves the advance payment of some type of pending expenditure. One common example of a deferred charge is when rental or leasing fees are paid for several months in advance. The issuer of the advance payment carries the amount of the transaction as an asset in his or her accounting books until the advance rental payment is applied to the actual months covered by the payment. Once the deferred charge has been exhausted, the issuer can properly record the deferred charge as a debit or liability that has been settled.
A deferred charge is the issuers counterpart to the deferred revenue recorded by the recipient of the advance payment. With deferred revenue, the recipient records the payment as a liability until the products or services are actually provided to the issuer of the payment. The issuer records the same balance as an asset on his or her books until the applicable goods or services are provided by the recipient. This combination of accounting strategies helps to keep the accounting records for both the buyer and seller in sync during the period between the issuance of a payment and the reception of the promised goods and services.
Issuing an advance payment as a deferred charge is often helpful to both parties. The issuer of the payment often has the peace of mind of having already partially or fully paid for services that will be rendered in short order. At the same time, the recipient of the deferred charge can often make use of the resources to help fulfill his or her obligation to the buyer. As a result, both parties benefit from the transaction and ultimately profit from the arrangement.
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