Prepaid expense and deferred expense both are of same nature and people get confused when they want to use them because both of them will occurred when you did advance payment. So the basic difference in both of them is use of the advance payment yes this is the key difference in prepaid expense we use advance payment quickly but in deferred expense it will be use after one year or later
Companies have the option to pay expenses for certain costs related to doing business, creating accounting accounts known as prepaid expenses or deferred expenditure, for accounting purposes, the amount of both Pre-paid expenditure and deferred expenditure is the balance of a company The sheet is recorded on
the sheet, and the deduction for consuming the property for each is deducted.Since a business does not immediately deduct the benefits of the goods or services purchased, both prepaid expenses and deferred expenditure are recorded as assets in the company, unless good or the price of the service is fully realized. Although prepaid and deferred expenses are advance payments for goods or services, however there are clear differences between the two general accounting terms.
Prepaid expenses Most of the prepayment payments made by the company are classified under the label of prepaid expenditure. These prepaid goods or services use those businesses which purchase or decrease within a year, such as rent or property tax, until the profit of the purchase is realized, the form of present property on the prepaid expense balance sheet Is listed in For example, if a company leases $ 30,000 to your landlord on rent from January to June, then the business is able to include the total amount paid for the current assets in December. Upon each month, the prepaid expense account for rent reduced by monthly rent amount is reduced until a total reduction of $ 30,000. Consumption of property rent, property tax, insurance premium and interest expenditure, if consumed for a common prepaid expenditure within one year.
Journal entry for prepaid expense
Prepaid expense Dr
Cash/Bank Cr
Deferred expenses Suspended expenditure, also known as deferred charges, is a long-term category of prepaid expenses. When a business buys goods or services for which the consumption is not immediately done or the plan is not made within the next 12 months, a deferred expense account is organized on the balance sheet as a non-property asset. After the initial purchase, the total expenditure of a deferred expenditure may be years. For example, a business that issues bonds to raise capital, there are huge costs during the issuance process. It may include documentation, legal fees to prepare investment banking fees or fees associated with accounting services for bond underwriters, which can add up to hundreds of dollars for all the companies. Debt issuance fees can be classified as a deferred expenditure, and the company can reduce the share of the bonds equally in the 20- or 30-year lifetime. Other common deferred expenses include startup costs, purchase of a new plant or facility, transfer costs and advertising expenses
Deffered Expense Dr
Cash/Bank Cr
Prepaid expenditure and deferred expenditure are both important aspects of the accounting process for a business. As such, it is necessary to understand the difference between the two words for the reports in the most accurate manner and the account.