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What is a deferred cost?

A deferred cost is a cost that occurred in a transaction, but will not be expensed until a future accounting period.

An example of a deferred cost is the fees necessary to register a new bond issue. A company will likely have to pay attorneys and accountants to prepare and audit the many statements required by government agencies. When these fees are significant, they are recorded as deferred costs in the long-term liability account, Bond Issue Costs or Unamortized Bond Issue Costs. The amount of the deferred costs will then be amortized (systematically charged) to Interest Expense over the life of the bonds.

A second example is the amount paid in advance for the next six months of insurance. This prepayment is a deferred cost that is recorded in the current asset Prepaid Insurance. In each of the future months, one-sixth of the deferred amount of the insurance premium should be charged to Insurance Expense.

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 depreciated over the life of the building—instead of being expensed immediately as interest expense.