Definition of Deferred Expense and Prepaid Expense
Deferred expense and prepaid expense both refer to a payment that was made, but due to the matching principle, the amount will not become an expense until one or more future accounting periods. Most of these payments will be recorded as assets until the appropriate future period or periods. Sometimes these amounts are referred to as prepayments.
Before a balance sheet is prepared, the accountant must review the deferrals/prepaids and move the appropriate amounts to expense.
Difference between Deferred Expense and Prepaid Expense
It appears that most accountants refer to the deferrals that will become expenses within one year of the balance sheet as prepaid expenses. The amount that has not been expensed as of the balance sheet date will be reported as a current asset.
The deferred expenses that will not become expenses within one year of the date of the balance sheet will be reported in the long-term asset section of the balance sheet under the classification of other assets. (An exception is the costs of issuing long-term bonds. This amount is reported on the balance sheet as a contra liability account along with Bonds Payable in the long-term liability section.)
