Category: Dictionary

Accrued expense is an expense that has been incurred but has not yet been paid. Put it in simple words, payment for these expenses are done after the product or service is taken. For example, salaries & wages, interest on bank loan, income tax etc.

Contrary to prepaid expense, an accrued expense is treated as current liability (If the expense is expected to be paid with a year) and shown on liability side of a balance sheet.

These expenses are recorded for the period in which they incur and not for the period in which payment is made.

For example, company XYZ ltd paid salaries to its employees for the month of March 2017 on 3^rd April 2017. The company will make a journal entry for the month of march (for which salaries were issued) and not for the month of April (in which salaries were paid).

Deferred expense (also known as prepaid expense) is the cost which has been incurred but the product or service has not yet been received or consumed.

As this is the cost for advance payment, this is treated as current assets (If the underlying goods or services are expected to be taken within a year) on balance sheet of a company.

This expense becomes actual expense at the time when good or services are used by the company. At that time a reversal entry is made to settle the balance.

Rent paid in advance, Insurance premium paid etc. are the examples of prepaid expense.

Deferred revenue (also known as unearned revenue) is the income which has been received but the product/ service is yet to be delivered to customer.

As this is the amount which has been received in advance, this is treated as current liability (If the agreement is to provide goods/ services within a year) and shown on liability side of a balance sheet.

This becomes income when the order is fulfilled and product or service is delivered to customer.

Examples of deferred revenue:

Unearned revenue is most common for companies which provide software services to its customer and charge upfront amount.

Rent received in advance, prepayment for subscription for newspaper are the other examples of unearned revenue.

Employee Stock Option Plan (ESOP) is a corporate scheme in which sponsoring company distribute its share to the employees free of cost or at a price lower than market price. The price so decided is known as grant price or exercise price. This right can be exercised within time frame imposed by the company and only a fixed number of shares can be purchased by the employee.

Sometimes these shares are funded by bank loan taken by the employer. Dividend on these shares is then used to pay the loan amount.

Employees get benefited from this plan when market price of shares are higher than the grant price. This scheme is used by companies to retain its employees and to boost the morale of employees.

Difference between employee stock option plan and employee stock ownership plan

Employee stock option plan is different from the employee stock ownership plan in which shares are transferred only when an employee separates from the company.

For detailed information, please visit article – Employee stock option plan v/s Employee stock ownership plan

Discounted bill is a bill (Bill of exchange or promissory notes) sold by corporate to banks or credit institutions to raise fund. These bills are sold at discounted price than the par value. The discounted amount then credited to the seller’s account.

At the date of maturity, bank collects the amount from customer on behalf of seller and the amount of discount becomes interest for the bank.

It would be better to understand this process with the help of an example.

Example of Discounted Bill:

XYZ Ltd receives an order to deliver 100 chairs from one of its valuable customers ABC Ltd which agrees to make the payment of Rs. 50000 (100 chairs at the rate of Rs. 500 each) after 6 months from the date of delivery. XYZ Ltd delivers 100 chairs on 20^th Jan 2015. On the basis of payment terms, ABC Ltd has to pay the amount on 20^th July 2015.

On 15^th Feb 2015, XYZ Ltd gets an order from another customer to deliver 1000 chairs. XYZ Ltd needs to purchase raw material to manufacture 1000 chairs but it does not have enough fund for that. Also the company cannot ask ABC Ltd to pay the bill as there is an agreement between the two that the bill will be paid on 20^th July 2015.

XYZ Ltd approaches a bank to sell the bill and after due diligence bank agrees to purchase the bill at Rs. 45000 considering risk and interest factors. Bank now ask the company to inform ABC Ltd that it has to pay the bill to bank instead of XYZ Ltd. After confirmation for the same, bank credits the amount of Rs. 45000 in the account of XYZ Ltd.

On 20^th July 2015, bank collects the amount of Rs. 50000 from ABC Ltd. Now the difference between the par value (Rs. 50000) and credited amount (Rs 45000) to the XYZ Ltd’s account is the earning for bank.