Deferred Expense

An expense that has been incurred but not yet utilized is referred to as a deferred expense.

Unless the underlying goods or services are consumed, the cost is posted as an asset; thereafter, it is expensed. As it will be used up in a year, a deferred expense is initially posted on the balance sheet as a Asset.

1. Configuring Deferred Accounting

Introduced in Version 13

Go to: Accounts > Settings > Deferred Accounting Settings. There are the following:
- Enabled by default.
- Process Deferred Accounting will need to be manually applied to process deferred accounting entries if it is turned off. Deferred Accounting Entry Processed Automatically

Deferred Expense

Book Deferred Entries Based On
- Days (default): Allocates costs based on the number of days in a month.
  - For example, $12,000 over 12 months is > $986.30 in a 30-day month and $1,019.17 in a 31-day month.
- Months: Spreads costs evenly across the months.
  - Example:, $12,000 over 12 months is > $1,000 per month.
Book Deferred Entries through Journal Entry
- By default, ledger entries post directly.
- Permit deferred postings to go through Journal Entries.
Submit Journal Entries
- Applies only when entries are posted via Journal Entry.
- By default, JEs stay in Draft for review.
- Enable to have them submitted automatically.

2. How to Use Deferred Expense

Example

For the rent in May, Unico Plastics pays approximately $10,000 in April. The cost is capitalized in April as Prepaid Rent (Asset) and amortized in May.

Other common deferred expenses include:

Insurance prepayment;
Subscription on Internet on annual basis;
Amortization of intangible assets;
Depreciation of fixed assets;
Issuing debt cost

2.1 Item Setup

In the Deferred Expense part of the Item Master:

Enable Deferred Expense.
Select a Deferred Expense Account (typically a Current Asset).
Determine the number of months.

2.2 Purchase Invoice

When a Deferred Expense item is included in a Purchase Invoice:

The system credits the Deferred Expense Account (Asset) in lieu of the Expense Account. An example would be an upfront payment for an Internet subscription.

2.3 Journal Entry

According to the From Date and To Date in the table Purchase Invoice Item, ERPNext creates Journal Entries automatically at the end of each month.

Credit: Expense Account
Debit: Deferred Expense Account

Deferred Expense