Quora Answer: What is a Deferred Asset?

The following is my answer to a Quora question: “What is a deferred asset?” 

A deferred asset is simply any expenditure made in advance, and yet to be consumed.  This could be due to a short consumption period, such as any purchased item expected to be consumed within months.  This deferred asset would be recorded as a prepaid expense, so it appears in the balance sheet as a current asset first.  Or, conversely, this could be due to a long consumption period, such as any purchased item that is consumed over several reporting periods.  In such a case, the deferred asset would be recorded as a long-term asset in the balance sheet instead. 

We treat these expenditures as deferred assets to give a better picture of costs.  Otherwise, items with short consumption periods would be charged as an expense before their benefits have been consumed, resulting in inordinately high expense recognition.  Items with long consumption periods would show excessively low expense recognition in the later reporting periods.  Accounting for deferred assets does not apply to businesses which uses cash basis of accounting, because all expenditures are recorded as expenses as soon as they are paid for.  The most common examples of deferred assets include prepaid insurance, prepaid rent and leases, prepaid advertising, and costs related to corporate bond issuance.