Accounting For Deferred Assets
Deferred assets are assets which have been recognized on a company’s balance sheet but have yet to be realized. They can include things such as prepaid expenses, prepaid taxes, and deferred revenue. Deferred assets appear on a company’s balance sheet in the “assets” section and are usually grouped together with all other current assets.
In order to understand how to account for deferred assets, it is important to understand the concept of deferred revenue. Deferred revenue is money that has been received ahead of time for services or products which have yet to be delivered. For example, a customer may pay in advance for a subscription to a magazine that won’t start for a few months. This amount will be recorded as deferred revenue and will be recognized when the service or product is delivered.
The accounting treatment for deferred assets is relatively straightforward. When a deferred asset is recorded, it is credited on the balance sheet with an offsetting debit to the asset being deferred. This debit is called a “deferred liability”. As the asset is realized its corresponding liability is reduced with a debit to the asset and a corresponding credit to the deferred liability. The balance of the deferred liability is then recognized as income when the asset is realized.
The accounting treatment of deferred assets may vary slightly depending on the type of asset being recorded. For example, when deferred taxes are recorded, they are recognized on the balance sheet as an asset with an accompanying liability. The liability is then reduced when the tax is paid and the asset is therefore recognized on the income statement as a tax benefit.
In addition to recognizing deferred assets, an auditor must also assess the likelihood of them being realized. This is done by considering the probability of certain events occurring in the future which would lead to the asset being realized. For example, if a customer paid in advance for a subscription to a magazine,the auditors would need to assess the likelihood of that customer continuing with the subscription and not cancelling it.
Deferred assets are an important element on a company’s balance sheet and must be treated with due diligence when being audited. It is important for an auditor to ensure that the amounts being recognized are accurate, that the underlying transactions reflect accurate economic transactions, and that the likelihood of realization has been properly assessed. By doing so, the auditor can ensure that the company’s financial statements accurately reflect the economic reality of the asset and that shareholders are not deceived into believing that the asset is more certain of being realized than it should be.
