A deferred expense represents cash paid in advance for goods or services that will be consumed in future periods.
Deferred charges include costs such as those related to startup activities, obtaining long-term debt, or running major advertising campaigns.
Deferred charges typically extend over five years or more and occur less frequently than prepaid expenses, such as insurance, interest, or rent.
These costs are recognized in the income statement (P&L) in the period the goods or services are received and deducted from prepayments on the balance sheet.
[4] For example, if a company receives an annual software license fee upfront on January 1 but its fiscal year ends on May 31, the company using accrual accounting would only recognize five months' worth (5/12) of the fee as revenue in the current fiscal year's profit and loss statement.