Listen to a Business English Dialogue About Deferred charges
Eliana: Hi Howard, have you heard about deferred charges? They’re costs that are incurred but not immediately expensed on the income statement.
Howard: Oh, I see. Can you give me an example of deferred charges?
Eliana: Sure, one common example is prepaid expenses, like when a company pays for insurance or rent in advance.
Howard: So, these costs are recorded as assets and then gradually expensed over time?
Eliana: Exactly! The expenses are allocated to the income statement in future periods as the benefit of the prepaid expense is realized.
Howard: Are there any other types of deferred charges besides prepaid expenses?
Eliana: Yes, another example is deferred financing costs, which are costs associated with obtaining financing that are amortized over the term of the loan.
Howard: Ah, I see. So, deferred charges help to match expenses with the revenues they generate?
Eliana: That’s correct! They ensure that expenses are recognized in the periods when they contribute to earning revenue.
Howard: Do deferred charges have any impact on a company’s financial statements?
Eliana: Yes, they affect both the income statement and the balance sheet. They reduce reported expenses on the income statement and increase assets on the balance sheet.
Howard: Thanks for explaining, Eliana. Deferred charges seem like an important concept for understanding a company’s financial health.
Eliana: You’re welcome, Howard. They play a significant role in financial reporting and analysis.