How Deferred Debit Works

Deferred debit is best described as a prepaid expense. It is a service or good that someone pays for but doesn't necessarily use right away or hasn't expired yet. On the accounting end, a bookkeeper records deferred debits that have a lifespan of one year in a ledger as an asset. So on your balance sheet, you would record a prepaid electric bill, for instance, as an asset since you gained something.

When you make a transaction against the prepaid asset, you will write it as an expense (since the asset is technically an expense)—but it is not an expense in the accounting world. It can be a bit confusing at first, but as long as you separate meaning from the name, you should be okay. Once you use your prepaid electric bill in any amount, you would record the amount you spent as credit since you "lost" something.

Things you can consider a deferred debit, or pay in advance to make them deferred debits, are:

  • Rent
  • Insurance
  • Taxes
  • Interest expenses
  • Salaries
  • Equipment rentals

Example of Deferred Debit

The two most common types of deferred debits, or prepaid expenses, are rent and insurance policies. Say you're about to move into a new apartment that has a monthly rent of $800. The landlord requires you to pay the first month's rent, but you decide to pay an additional five months. Remember that when you debit your account, you increase your assets. When you credit something, you decrease your assets. Anything you do to one side of the ledger, you must do on the other (credits and debits need to balance).

With this $4,800, you've prepaid an expense—rent. As every month goes by, this amount decreases by $800. Your ledger would reflect this as a prepaid rent debit of $4,800 and a cash credit of $4,800. After the end of the first month, you would record a prepaid payment as rent expense debit (since this expense is technically an asset) $800 and a prepaid rent credit of $800.

If you pay for renter's insurance, you will—for the sake of this example—have to pay the total amount upfront to receive coverage. Your total coverage is $1,200 for the year. Your initial transaction would be a prepaid insurance debit of $1,200 and a cash credit of $1,200. The next month, your transaction would be an insurance expense debit of $100 and a prepaid insurance credit of $100.

Deferred Debit vs. Deferred Debit Card vs. Prepaid Debit Card

A deferred debit deals with prepaid expenses. A deferred debit card is a transaction style in which you make a purchase, but the bank doesn't remove your account's funds right away. A deferred debit card is not a credit card—you do not have to pay back a company for the funds you used since a deferred debit card's funds are from your debit account. A prepaid debit card is not an expense, and therefore, not a deferred debit.