Definition
Unexpired Cost is the concept of an expenditure’s value that remains in the books of an organization and has not yet been expensed through the profit and loss account. This cost is often associated with assets, such as equipment or inventory, that provide future economic benefits. The net book value (NBV) of an asset typically represents its unexpired cost.
Examples
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Prepaid Insurance: If an organization pays $12,000 for 12 months of insurance coverage, and only three months have elapsed, the unexpired cost would be $9,000 (covering the remaining nine months).
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Long-term Plant and Equipment: If a company bought machinery worth $100,000 and has depreciated $20,000 over two years, the unexpired cost (or net book value) would be $80,000.
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Subscription Services: For a company subscribing to a software service for three years at a cost of $36,000 and has used up the service for one year, the unexpired cost remaining is $24,000.
Frequently Asked Questions (FAQs)
Q: How is unexpired cost reported on the financial statements?
A: Unexpired costs are generally reported on the balance sheet as assets. They remain there until they’re expensed to the profit and loss account, typically through amortization or depreciation.
Q: What is the difference between expired and unexpired costs?
A: Expired costs have already provided their economic benefit and have been expensed through the profit and loss account. Unexpired costs still hold future economic benefits and thus remain on the balance sheet as assets.
Q: Can unexpired costs include intangible assets?
A: Yes, intangible assets like patents, trademarks, and prepaid royalties are considered unexpired costs until they are amortized.
Q: Why is tracking unexpired costs important?
A: Tracking unexpired costs is crucial for accurate financial reporting and planning. It ensures that companies do not prematurely expense items, potentially distorting financial performance metrics.
Q: Are unexpired costs subject to impairment?
A: Yes, unexpired costs, such as long-term assets, may need to be reviewed for impairment, especially if their future economic benefits reduce due to changes in market value or other factors.
Related Terms
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Accrual Accounting: Accounting practice where revenues and expenses are recorded when they are earned or incurred, regardless of when the cash transactions happen.
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Net Book Value (NBV): The value of an asset after accounting for depreciation or amortization.
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Depreciation: Allocation of the cost of a tangible asset over its useful life.
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Amortization: Similar to depreciation, but it applies to the expense allocation of intangible assets over a specific period.
Online References
- Investopedia - Understanding Unexpired Cost: Investopedia
- Accounting Tools - Unexpired Cost Explanation: Accounting Tools
- Corporate Finance Institute (CFI) - Net Book Value (NBV): Corporate Finance Institute
Suggested Books for Further Studies
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Financial & Managerial Accounting by Jan Williams, Susan Haka, Mark Bettner, and Joseph Carcello - A well-rounded guide to the fundamentals of both financial and managerial accounting.
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Cost Accounting: A Managerial Emphasis by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan - Provides in-depth coverage and insight into cost accounting, focusing on managerial applications.
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Principles of Accounting by Belverd Needles and Marian Powers - Offers clear explanations and thorough coverage of key principles in accounting.
Accounting Basics: “Unexpired Cost” Fundamentals Quiz
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