Deferred cost is a cost that has already been incurred by an entity, but which corresponds to more than one financial period, and hence will not be charged in whole to the income statement for the particular period during which it is incurred. The portion relating to future periods will appear on the balance sheet as an asset. Deferred cost (charges) may include professional fees and the amortization of intangible assets such as trademarks, copyrights and research and development (R&D). Deferred cost of such assets constitutes the cost of an asset that is charged to expense over time as amortization.
In addition to the above, the following types of costs are amongst the prime examples of deferred cost:
- prepaid items (prepaid insurance, prepaid rent, prepaid tax, etc.)- e.g., prepaid insurance constitutes insurance paid in advance for coverage/ protection in future periods.
- the cost of a fixed asset that is charged to expense over time (depreciation).
- interest cost that is capitalized (and will be amortized) as part of a fixed asset.
