Definition of Deferred Cost
A deferred cost is a cost that is already recorded in a company’s accounts, but at least some of the cost should not be expensed until a future accounting period.
Examples of Deferred Cost
Assume that a newly formed company paid $600 on December 30 for liability insurance for the six months that begins on January 1. For the next two days, none of the $600 will be reported as an expense. Instead, all $600 of cost is being deferred until the new year. Therefore, as of December 31, the company’s balance sheet will report $600 as the current asset Prepaid Insurance.
During the month of January, the company should report $100 of insurance expense. At the end of January, the company’s balance sheet should report Prepaid Insurance of $500 (indicating that $500 of the original $600 cost remains deferred).
The capitalization of interest involved when a company constructs its own building is also a deferred cost. The reason is that the interest will be added to the cost of the building and then depreciated over the life of the building—instead of being expensed immediately as interest expense.
