Often the term deferred expense indicates that a payment was made more than one year before the cost is expensed. This deferred expense will be reported on the balance sheet as a noncurrent or long-term asset.
Often the term prepaid expense indicates that a payment was made less than one year before the cost is expensed. This prepaid expense is reported as a current asset.
Sometimes an accountant does not intend for there to be a difference. For example, an accountant might say that part of a company’s six-month insurance premium should be deferred to the current asset account Prepaid Insurance. Accountants also state that any prepayment of a future expense will result in an adjusting entry known as a deferral.
Learn more about Adjusting Entries.
About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.
He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.
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