Deferred expenses in the balance sheet are intended to summarize information on the costs that were incurred in this reporting period, but relate to upcoming periods. Such a definition is given in the Regulation on maintaining financial statements and in the instructions for using the Chart of Accounts.
Accounting for deferred expenses is, therefore, a method of distributing already committed costs. Moreover, the category of these costs does not include operations related to the disposal of assets, advances or prepayments, including.
When reporting, the conditions under which deferred expenses are recognized must be taken into account. In particular, costs are incurred in accordance with a specific requirement of regulatory or legislative acts, an agreement, and business traditions. One of the conditions is the ability to determine the amount of costs. Deferred expenses are recognized as such if there is confidence that the outcome of a particular transaction will reduce the economic benefits of the enterprise.
According to the instructions to the chart of accounts, costs, in accordance with their economic content, are divided into two categories. The first includes preparatory expenses. They are associated with future earnings. Such expenses, in particular, include the costs of mastering new production technologies, mining and preparatory measures, preparation for seasonal work, and so on. The second category includes expenses of the current period. This group, in particular, includes the costs of repairs of expensive production equipment. For such costs, reflection under the relevant article is considered to be no more than "smoothing out" unevenness, using an arbitrary distribution of a substantial amount of costs over several periods.
It should be noted that the Instruction does not mention expenses that are continuous or recurring. These include, for example, the costs of licensing an activity, paying for insurance, and for purchasing rights to use software transferred for a specific period. Advance payments for rental payments are also not indicated in the document.
Deferred expenses related to future income are divided into two groups. The first includes costs directly related to future profit. They, in particular, include preparatory costs for production needs. The second category includes income-related expenses not clearly, indirectly.
Costs are recognized in the profit and loss statement, given the relationship between revenues and costs of production (in accordance with the principle of cost-benefit ratio). From this it follows that the expenses of the coming periods should include the costs that directly determine the profit. This profit may or may not come in the future.
In addition, costs can reasonably be allocated between reporting periods. This is possible provided that the costs determine the receipt of profit over several periods or if the relationship between expenses and income cannot be clearly defined or is established indirectly.
It follows that the method of accounting for costs associated with upcoming profits indirectly (indirectly) will depend on the professional personal opinion of the accountant. The indicated costs may be allocated, but only if there are convincing justifications for their connection with future profit. If there is no such justification, then production costs must be considered as costs in the current period without allocation.